It’s been an interesting month of August for ride-sharing giant Lyft (LYFT). Earlier in the month, Lyft posted its second-quarter earnings results, which came in mixed. Initially, the lackluster performance led to volatility in LYFT stock. Still, a major shakeup in leadership helped the stock catch a bid, rising over 15% in the trailing 30 days leading up to the Labor Day weekend.
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Of course, the question now is whether the implied strategic shift will be enough for LYFT stock. In the intermediate term (over the next two months), I see plenty of risks despite LYFT exceeding earnings expectations in every quarter since 2023.
However, the confidence level in the bearish argument is nowhere near enough to warrant a short position. Therefore, my argument focuses on deploying a capped-risk, capped-reward options strategy known as a “bear put spread.” In other words, I’m Bearish on LYFT stock, but for a specific reason and a targeted options approach.
Fundamentally, LYFT stock may seem intriguing to bullish contrarians. As TipRanks contributor Casey Dylan pointed out, the ride-sharing platform posted record quarterly results with $1.6 billion in revenue. It also generated nearly $1 billion in free cash flow over the past year. Sure, the sales target did miss Wall Street’s expectations. However, Lyft’s co-founders, Logan Green and John Zimmer, announced they were stepping down from the board, thus reinvigorating investor sentiment.
Moving forward, though, the concern is that this fundamental catalyst has likely been baked into LYFT stock. Instead, conditional probabilities suggest heightened volatility risk; thus, a bear put spread may be a more prudent idea (if you decide to speculate at all).
Explaining the Two Methodologies Involved in Options Analysis
Before discussing options, it’s helpful to understand how these derivative instruments are priced. Conceptually, options operate as insurance contracts. Traders buy insurance to protect against upside or downside risks, which is a debit-based approach. On the other hand, advanced traders can underwrite insurance products by selling calls and puts, which is a credit-based approach.
Now, part of what makes options trading so complex is that these insurance products represent a market within a market. Of course, these products can’t just float around with haphazard premium pricing. To provide a standardized valuation system, the Black-Scholes-Merton (BSM) model was introduced. With this innovation, Wall Street can effectively price these derivatives based on their forward volatility expectations.
While that may sound great, the projections based on the BSM formula are structurally presuppositional. More specifically, BSM assumes that volatility is constant and follows a log-normal distribution. In reality, however, volatility is not constant, with the market demonstrating asymmetric dynamics and statistical “fat tails” much more frequently than the model predicts.
At its core, the BSM formulation is parametric, assuming a distribution and fitting data to this assumption. It’s great if the assumption is correct. On the other hand, if it’s incorrect, the subsequent analysis may feature significant distortions.
The Downside of Using Black-Scholes-Merton
Perhaps the worst part about parametric models like BSM is that they’re not predictive in the intuitive sense. Stated differently, the BSM formula only tells you what puts and calls should be priced at; it does not tell you which side of the coin is more likely to be profitable.
To answer that question for LYFT stock or any other security, a non-parametric model may be required. In the most elemental sense, non-parametric models don’t assume a distribution for the target dataset. Instead, they let the data speak for itself. You can think of parametric models as editorials (opinions), whereas non-parametric models are quantitatively sourced.
This might arouse a critical question: why doesn’t Wall Street use non-parametric models? While there are likely many reasons, it probably comes down to speed. With BSM, the structure is standardized and has a closed-form solution. Plug in the share price of the stock you’re analyzing, and the formula will generate various results. That’s why all the “expected move” calculators look the same — the underlying scaffolding is practically identical.
On the other hand, non-parametric models — because they’re not assumptive — must craft a unique risk-reward profile for each and every stock. Thus, if there are 5,000 optionable stocks, then non-parametric analysts must develop 5,000 unique statistical profiles.
Identifying a Potential Bearish Opportunity in LYFT Stock
Using a non-parametric model, we can extrapolate the pricing geometry of LYFT stock. This approach, while not as elegant as the stochastic calculus undergirding the BSM formula, has the advantage of respecting LYFT’s actual pricing geometry.
As it turns out, over the next 10 weeks, LYFT stock — assuming no special mispricing — would be projected to range between a median low price of $14.51 and a median high price of $15.84. Notably, under normal circumstances, the ride-sharing giant would be expected to drift downward over the next two months.
However, what’s really intriguing is that LYFT stock printed a rare quantitative signal. Over the past 10 weeks, the market has effectively voted to buy LYFT four times and sell six times, yet the stock has seen an upward trajectory. For classification, this sequence can be labeled 4-6-U.
With the 4-6-U sequence flashing, the pricing expectation over the next 10 weeks shifts significantly, ranging from a median low of $13.42 to a median high of $16.84. While that might seem initially encouraging, the overall skew of the forecasted range is negative. As such, I believe LYFT stock is precariously positioned.
Those who want to take their skepticism further by betting on a downside move may consider the 16/15 bear put spread expiring October 17th. This transaction involves buying the $16 put and simultaneously selling the $15 put, for a net debit paid of $44 (the maximum possible loss on the trade).
Should LYFT stock fall through the short strike price of $15 at expiration, the maximum profit is $56, a payout of over 127%. What makes this idea attractive is that, through the non-parametric lens, both the baseline and conditional expectations appear to signal volatility risk.
Is LYFT a Good Stock to Buy?
Turning to Wall Street, LYFT stock carries a Hold consensus rating based on six Buys, 19 Holds, and one Sell rating since June this year. The average LYFT price target is currently $16.42, implying ~1% upside potential over the coming year.
LYFT Stock Could Be a Ride Worth Cancelling
While the leadership change may help shake out some of Lyft’s strategic cobwebs, it’s also a catalyst that has likely been priced in. Moving forward, based on non-parametric analysis that respects the actual pricing geometry of LYFT stock, the ride-sharing giant faces downside risk over the next two months. Those interested in directly speculating on their skepticism may consider buying a bear put spread and capitalizing on existing bearish sentiment.