Trading Places with Tom Bowley

Be VERY Careful If You're Trading Peloton (PTON)

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Listen, I'm a big fan of PTON. It was one of my 5 stock picks from StockCharts TV's "The Pitch", which aired on April 1st of this year. It traded at near 27 at the time. Yesterday, PTON closed above 127. That's not a misprint. It's risen from 27 to 127 in a little more than 6 months. The company is clearly growing rapidly, thanks in large part to the pandemic and consumers' interest in exercising at home. I believe this is a paradigm shift that will benefit PTON for years to come. PTON is currently one of the ten stocks that comprise our Strong AD Portfolio, which is crushing the S&P 500.

I honestly see this company going much higher as estimates are raised. So, from a longer-term perspective, I believe it's a BUY or a HOLD if you already own it. My warning is regarding the very near-term. The stock market is a very inefficient creature in the near-term, and that's EXACTLY what creates opportunities for traders. Let me sum up the short-term risk for PTON in one word.

Options.

At yesterday's close, PTON was at 127.30. When I looked at all the open interest on PTON for October, I realized there was a TON of net in-the-money call premium. The gamblers are in the house. Options traders are currently throwing caution to the wind, buying calls at any price. If you're in this camp, you need to be very careful. I calculate that the net in-the-money call premium totals $324 million. Market makers are likely on the other side of this, increasing the risk of sudden bursts of selling into options expiration Friday and throughout next week. You should also keep in mind that October 21-27 is the worst week of the year on the S&P 500 since 1950. The combination of overzealous options traders and historical weakness could lead to short-term selling in many stocks, including PTON.

Here's the current chart with "max pain" highlighted with a horizontal line:

I want to be very, very clear about one thing. I am not suggesting that PTON is heading to 91. I use max pain and my options research to identify risk. I believe that holding PTON into options expiration and the week after options expiration presents extraordinarily high risk. One important point to make here is that PTON's volume has been exceptionally high and market makers may be utilizing a covered call strategy where they sell calls and then buy shares. That protects them, so the fact that PTON currently trades well above max pain doesn't mean that market makers are losing money. However, if market makers begin shorting the stock, it's a win-win-win for them. They win on the long side by buying shares as they're selling calls. Then they win on the short side if PTON pulls back temporarily. Any such short-term pullback would then begin to erase the call premium that market makers would be responsible for - a third win. Any time market makers have an opportunity to make more money, you better take that threat seriously. They'll sell family members to earn another buck.

I am hosting our monthly Max Pain webinar for EarningsBeats.com members at 4:30pm ET today. If you'd like a fully-refundable $7 30-day trial to join me this afternoon, CLICK HERE. I'll be discussing PTON and other stocks that will likely be impacted by October options expiration this Friday, plus I'll be looking at both the SPY and QQQ to gain short-term directional clues for the overall market.

I hope to see you there!

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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