Perma-bulls may see a less-than-fit environment right now for investing, but one name that has slimmed down to attractive levels is recent IPO Fitbit (FIT). And for traders interested in making a position even leaner and better conditioned for today’s volatile market, a bullish option spread is something you might try wearing.
Corrections can be messy affairs, but the flipside is that traders often have the opportunity to pick up their favorite stocks at prices that may have seemed impossible not so long ago. One name on many traders’ radars this summer and in that type of position is market newcomer Fitbit stock.
Unless you’ve just returned from Mars, you’ve probably heard of Fitbit stock. The fitness wearables company has quickly made its mark in this up-and-coming niche, which includes smart watch manufacturers like Apple (AAPL), Samsung (SSNLF) and Garmin (GRMN).
Can Fitbit maintain a sustainable edge or even get bought out — and in the process please Fitbit stock shareholders down the road? I don’t know, but I’d guess Fitbit needs to continue to innovate. The truth is new products from its competition are, even for a tried-and-true diving watch aficionado, sounding way cooler than even the last generation of products from Fitbit.
But Fitbit stock now has a market cap near its enterprise value of $6.53 billion. Plus it has no debt, huge year-over-year sales growth of 253%, a forward price-to-earnings ratio of 34 and PEG ratio of 1.59. In other words, the numbers are getting interesting. And because this pullback in valuation has occurred as FIT took a technical “dive” of its own on the Fitbit stock chart, I’m “watching” the name as a long position.
Fitbit Stock Daily Chart
Looking at the provided daily chart of Fitbit, FIT stock is developing a potential double-bottom formation following a stiff, but healthy correction in excess of 40% over the past month.
Double-bottoms come in a couple different variations. There’s the classic level test of the prior lows, which would require a move to or very close to the $29.50 low set on Fitbit stock’s first day as a publicly traded company.
A second variation is the higher-low double bottom. Currently — and if last Monday’s low holds and shares of Fitbit stock reverse higher without undercutting last week’s low of $30.51 — a higher-low, double-bottom will be established.
The final type of double-bottom that can form is the lower-low or undercut double-bottom. If FIT shares take out the all-time-low of $29.50 without straying too far below that price before reversing higher, then an undercut version is generally agreed upon as having formed.
Currently, the double-bottom in Fitbit stock and all its variations are all in play — i.e. all three could form at this point in time. As a fair warning to would-be bullish traders in Fitbit stock, a double-bottom isn’t a guarantee of future profits. The pattern could always fail.
And, alternatively, shares of FIT could also simply trade to fresh lows, not even giving a double-bottom a chance to form without a meaningful daily or weekly chart pivot low.
Fitbit Stock Bull Call Spread
The intention of using the double-bottom is for positioning bullishly in anticipation of a stronger and more durable formation to leave its mark on the Fitbit stock chart. So I like the idea of using an out-of-the-money bull call spread that is capable of landing in-the-money.
Reviewing the options board in Fitbit stock, the October $35/$40 bull call spread for a debit of $1.10 or better might be considered appropriate in conjunction with money management.
The softer directional bias to start means the trader has some decent wiggle room in FIT if they decided to use a 50% stop loss on the price paid for the vertical. A current estimate based on the spread’s Greeks suggests this sort of exit would be triggered roughly 2% below Fitbit stock’s low of $29.50.
Should Fitbit stock stabilize and rebound higher from a double-bottom pattern, a move through last week’s highs put the vertical in position (at expiration) to realize the maximum profit of $5 minus the initial cost of the spread. Now that would be a good time, while also keeping the portfolio fit!
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
