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While the major indices have slowly started to recover following the government shutdown news, Peloton (PTON) represents a notable excursion. An exercise equipment and media company, Peloton has struggled badly following the normalization from the COVID-19 pandemic. In the past six months, though, PTON stock has managed to gain over 31%. Still, as today’s volatility demonstrated, the ride hasn’t been smooth.

In the midweek session, PTON stock dropped more than 9%, raising concerns that its prior rally has simply run out of gas. According to a TipRanks report, investors have largely been unimpressed with Peloton’s transition toward artificial intelligence. Specifically, the company introduced Peloton IQ, a computer vision system that provides customers with personalized guidance.

Not surprisingly, PTON stock ranks among the most shorted securities in the market. Per Fintel, the equity’s short interest stands at 18.71% of its float. What’s more, the underlying ratio clocks in at 5.14 days to cover. In other words, almost 20% of PTON’s pool of publicly available shares have been shorted and it would take more than a business week for the bears to fully unwind their exposure.

Ordinarily, that would be considered pessimistic for PTON stock. However, because of the threat of tail risk — or the ever-rising danger of an obligatory payment as the underwritten risk gets realized to the extreme ends of the distribution — a heavily targeted security could swing violently in the “wrong” (as in upward) direction. This is a phenomenon known as a short squeeze.

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Another factor to keep in mind is the options market, the arena of the smart money. Near the beginning of the month, net long premiums bought — a metric that backs out bearish puts and (sold) calls and bakes in bullish calls and (sold) puts — sat at $149,570. On a cumulative basis, this figure at the end of the month stood at nearly $2.9 million.

Granted, options can be exercised early so the cumulative figure should not be treated as gospel. However, it does demonstrate that over the trailing month, the net result has been that smart money traders have exposed themselves to the bullish side of the spectrum, not the bearish.

This doesn’t guarantee upside for PTON stock. However, it might be premature to call off the rally.

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