On August 18th my order to purchase-to-close a contract to sell 100 Peloton (PTON) shares at $55 was exercised. This particular contract was initially sold on August 4th for $1.28 per share with a strike price at $55 and expired on August 28th. Had the contract been executed while I maintained the short position, I would have been issued 100 shares with a cost basis of $53.73.
Over the 14 days we held the position, we netted $111.61 with $5,500 exposed to the downside of the trade. Were we able to reinvest at the same rate of return for a full year, our return would be almost 53%.
On August 4th, near the time I entered the order to initiate the position, PTON traded at $71.06 per share which required shares to depreciate 23% in 24 days for our option to be exercised. Today, when the position was terminated, PTON shares traded at $67.53, down 5% from 14 days prior, but up almost 5% ($64.44) from when I analyzed the position yesterday. With ten days remaining on the contract, the market seemed to have assumed PTON would not deprecate another 19%.
In June we were paid a similar premium for waiting for PTON shares to go on sale (or, offered similar downside protection to the market, depending on your perspective). The strike price on the contract expiring July 17th was $43 per share, 22% lower than our August venture. On June 23rd, the date our previous PTON position was initiated, PTON shares traded around $55; PTON appreciated roughly 30% in the 6 weeks after we sold the contract on June 23rd. Such rapid appreciation in PTON shares left me hesitant to take a short position in a put contract, but a 23% margin of safety proved adequate, this time.
Much of PTON’s recent appreciation likely occurred while we were exposed, $4,300 for 100 shares, under the first contract because we only maintained the short position for 9 days. During our holding period, we initiated the position at $0.50 per share and bought to close at $0.08 per share. Netting $40.61 on the position, we earned an annualized rate of almost 55%, but couldn’t pay for a family meal unless we ate at the Costco food court.
Moving forward, I plan to take on longer-termed contracts that will allow me to earn better overall returns. While earning a quick $40 may yield an impressive +50% annualized return, capital returned to cash does not easily find another investment at such attractive rates.