My PTON Triple Play Hedge

Before I send out my week ending report I wanted to write on my Peloton Triple Play Hedge. Please read my page on this strategy if you don’t know what it is.

Most readers know I use this strategy from time to time. I am well aware it’s not for everyone. However, I think it’s still very important  for option traders to understand what I’m doing, and know the theory behind this, and other strategies.

The problem with executing the Triple Play Hedge (TPH) is it’s cost. I normally do it with 10 contracts. This week I did one with Peloton which trades above $100 per share. The TPH involves buying the shares of stock, in my case it’s 1000 shares. I started this week’s TPH with buying 1000 shares of PTON at $107.75. That’s $107,750. And that’s a lot of money!

With these shares I sell a 10 contract Covered Call. This doesn’t cost any more money and brings in a nice premium. The TPH requires you to sell an additional (2) 10 Naked Calls. For this you need the money in your account to deliver this stock, which is an additional 2000 shares. Too expensive for most traders, let alone Grasshoppers. This does not mean it’s not a good idea to understand the theory behind the strategy and how you can get hedging without buying another position. Hedging through selling options.

Let’s take a look at the TPH I did this week, and how it worked out.

First I bought 1000 shares of PTON at $107.75. Then I sold a 10 contract of the 10/9/20 $109 Covered Call for a $3500 premium. To make this a TPH I sold 2 more Calls. I sold 10 contracts of the 10/9/20 $118 Naked Calls for a $800 premium, and 10 contracts of the 10/9/20 $120 Call for a $550 premium. At this point I have brought in $4850 in premiums as insurance (Hedging) in the case the stock went down. Below is the Triple Play Hedge.

Peloton Triple Play Hedge

Buy 1000 Shares PTON @ $107.75

Sell to Open 10 PTON 10/9/20 $109.00 C @ $3.50 (+$3500) 

Sell to Open 10 PTON 10/9/20 $118.00 C @ 80¢ (+$800)

Sell to Open 10 PTON 10/9/20 $120.00 C @ 55¢ (+$550)

As the week moved along PTON was moving up. This is the reason I sold the $118 and the $120 Calls when the stock was in the $110 area. I had plenty of room before the stock approached my Strike Prices, which gave me time to buy the stock to cover these Calls if needed.

As you probably know the stock continued up. On Wednesday, with the stock at $113.75, I decided to buy another 1000 shares to cover the $118 Call.

Buy 1000 Shares PTON @ $113.75

On Thursday, the stock blew past the $118 Strike Price. I’m happy I decided to cover that position. With only 1 more day until all positions expire the stock went up to $119.

Buy 1000 Shares PTON @ $119

At this point I bought another 1000 shares to cover the last Naked Call, the $120. I now had (3) 10 contract Covered Calls.

Believe it, or not, PTON closed on Friday at $123.02. Everything worked out nicely. I feel the important thing was leaving a $10 space between selling the 1st Call and the 2nd & 3rd Calls. This gave me a lot of time to make decisions.

Let’s see the result of money made.

I made $4850 in premiums.

The 1st stock assigned at $109 I made $1250

The 2nd stock assigned I made $4250

The 3rd stock assigned I made $1000.

If you add up the premiums and the gain on the stock sales, this TPH made a grand total of $11,350.

I hope it’s clear that the Triple Play Hedge is a basic strategy involving buying stock, selling Covered Calls and selling Naked Calls. Yes it take a larger account to do a TPH with 10 contracts. Don’t forget you can make the same Rate of Return with a 1 contract TPH.

If you have any questions send me an email.

Watch for my week ending results. With the help of my TPH I had another huge week.

Successful trading,

Steve

The Options Coach