Peloton could hit all-time highs after earnings — one way to play it

Peloton could pop on earnings.

Options traders are expecting a moderate move higher for shares of the fitness technology company following its earnings report on Wednesday afternoon. While Wall Street expects Peloton to lose roughly 17 cents a share as it continues its expansion, traders are betting strong revenues and subscriber growth will boost shares in the near term.

On the chart, “you can see that the stock has been mostly sideways and … has been facing resistance” around the $36 level, Todd Gordon, managing director at Ascent Wealth Partners, said Tuesday on CNBC’s “Trading Nation.”

In the last few months, Peloton has made a “strong move up” from its March collapse followed by a minor pullback, which Gordon saw as “consolidation” below the stock’s old high of $38.08.

“On a strong earnings report, I would expect the stock to move higher to all-time highs,” Gordon said.

One way to trade the stock with some defined risk boundaries is using options, the trader said.

According to the options market, “there’s a relatively decent chance, if the stock responds well to earnings, we might get up to the $40.22 mark,” he said.

Peloton shares were up 2% in Wednesday’s premarket, trading at $36.99. The stock closed up nearly 7% on Tuesday at $36.22.

“If the earnings are not received well, options markets are expecting a move down as far as 31,” Gordon said. “I’d like to play the upside based on fundamentals, based on the technicals, so, one simple option trade that you may do is going out just to the May 8th. These options expire Friday. This is just an earnings play, that’s it. This is a trade, in and out.”

To execute it, Gordon suggested buying the $38 strike call and selling the $40 strike call, which at the time of the trade created a $62 debit from which he expected to earn some $137 of maximum profit. The bet represents a cautiously bullish one on Peloton’s implied earnings move.

Another way to play Peloton is by setting up a “butterfly spread”: Buy a $38 strike call and sell a $40 strike call like in the first trade, but also sell an extra $40 strike call and buy a higher $42 strike call, Gordon said. A butterfly spread is a trade that hedges downside risk while capping profit to bet on a specific move for a given security.

“All together, you’re buying a 38-40 call debit spread and then layering on top of that a 40-42 call credit spread. It drops your cost all the way down to 21 cents,” meaning there’s a $21 maximum loss, Gordon said. “Here’s the bad part: if the stock moves too high above $42, you also are susceptible to that $21 loss. But here’s a great thing about the butterfly: If you get up to that $40 mark, which is essentially the expected move, your max potential profit is upwards of around $165.”

Disclosure: Gordon and Ascent Wealth Partners own shares of Peloton;  CNBC parent Comcast-NBCUniversal is an investor in Peloton.