In May, Peloton (PTON) stock was still flailing around, looking like another overhyped IPO flop. But options activity picked up, and I pounced. The results have been remarkable.
While 2020 will be remembered for a global pandemic, and its long-term societal ramifications, I will always remember one positive nugget from this year: In 2020 I made the greatest options trade of my 20-year options trading career. Here are the details of what brought me into this trade, and how I managed it.
First, let’s travel back in time to the rocky months following the start of the pandemic. In late May the market had recovered some of its big losses from March, yet there was little trust in the small bounce-back for stocks. However, large hedge funds and institutions had started to buy call options in Peloton (PTON), and I was very intrigued about this somewhat recent IPO, that had mostly chopped around since coming public.
Here was my trade alert from May 28, when PTON stock was trading at 42, to my Cabot Options Trader subscribers detailing why we were buying PTON calls:
My Winning PTON Stock Trade
Buy the Peloton (PTON) October 45 Calls (exp. 10/16/2020) for $7 or less.
Peloton (PTON) has been on my radar since the company reported blowout earnings three weeks ago. Since then, despite many ups and downs in the stock, options traders have aggressively bought calls including these trades:
Today - Buyer of 2,100 Peloton (PTON) June 50 Calls for $0.60 — Stock at 42
Today - Buyer of 1,300 Peloton (PTON) June 44 Calls (exp. 6/5) for $1.07 — Stock at 42
5/22 - Buyer of 5,000 Peloton (PTON) June 50 Calls (exp. 6/5) for $1.11 — Stock at 46
5/19 - Buyer of 1,000 Peloton (PTON) January 60 Call (exp. 2022) for $13.15 — Stock at 44.5
This option activity, along with countless other buys, is very intriguing to me.
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For those reasons, I am going to add a PTON position to the portfolio today.
To execute this trade, you need to:
Buy to Open the October 45 Calls
The most you can lose on this trade is the premium paid, or $700 per call purchased.
A couple weeks later we sold half of our position for an approximate 20% profit. While this sale only half turned out to be a mistake, bigger picture, because I had profits in the bank, it allowed me to get hyper-aggressive with the balance of the position. And aggressive is exactly how I traded this position.
Day after day, week after week, PTON stock rose as more and more traders wrapped their minds around the fact that gyms would be closed for months, and what that meant. In reaction to this development the public was buying Peloton bikes as fast as the company could make them. Higher and higher the stock went.
Finally, three weeks ago, just days before our calls were set to expire, with the stock trading at 127, Cabot Options Trader subscribers sold their position for a profit of 1,142%!
If a Cabot Options subscriber had bought only one call, that positions would have made $7,540 per call purchased. If he/she had bought 10 calls, that position would have made $75,400.
And on and on.
So why was I able to hold on to the balance of our call position throughout such a tumultuous year? It’s the system I use at Cabot Options Trader.
My Options Trading System, Explained
When I execute a trade, my plan, if all goes right, is to sell half of my position for a 20%-30% profit. Then, with that money in the bank I shoot for the moon with the rest of my position. While singles and doubles are nice, it’s the grand slams that make a year—and a trading career.
Having sold half of my position, I then continue to track the stock, as well as how the hedge funds are positioning in the options market. And in the case of PTON, the stock went higher and higher, and options traders continued to buy calls looking for even more gains. For those reasons, I never sold.
That being said, I am not so confident in myself that I didn’t have protection against PTON stock falling. So, when our calls that were originally purchased for $6.60 traded higher and higher, I continued to raise my mental stop on my position. For example, if our calls were trading at $50, I would set a mental stop at $40. And then when the calls gained even more value, and were worth $65, I might raise my stop to $55.
Finally, time ran out on our position, and somewhat bittersweetly we locked in our 1,142% profit. The ride was spectacular, but it was time to say goodbye.
How did I celebrate my success, and the greatest options trade of my career? I hopped on my Peloton bike, had a 25-year-old female fitness instructor yell at me to push myself harder as sweat poured off my head, and smiled at one of the few bright spots in a tumultuous year.
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