Are you interested in a slimmed down, but still potentially heavy Fitbit (FIT) stock to go long? Be a smarter bull and buy at a stronger discount with limited risk using a Fitbit stock options spread.
A recent secondary offering has been anything but kind to existing bulls in Fitbit stock — and with the end of the full lock-up period looming on Dec. 15, there could be further declines ahead.
But we don’t know for certain. If FIT stock does move lower, that should make shares even more attractive … except to a stock technician maybe.
The recent secondary offering is much more than simply a bit of shareholder dilution. Rather, the capital raise was a commitment to Fitbit stock’s future prospects.
The reason behind the recent 17 million share secondary priced at $29 was so Fitbit could raise funds for further R&D and advertising. “In short, Fitbit is investing in growth,” according to The Street, and that should be great news for Fitbit stock.
There’s also the fact Fitbit stock is just off all-time-lows and the decline in shareholder value has developed despite a massive beat and guidance raise. Further and something investors might chew on, Fitbit isn’t likely to be a one-hit wonder with a fad product.
Fitbit’s fitness devices aren’t just part of a growing market for fitness and health monitoring wearables — their mass market product line runs a wide range of price points for consumers of all sorts of budgets.
Sure, there’s increasing competition from companies like Apple (AAPL), Samsung and Garmin (GRMN) for Fitbit stock investors. But as the market leader, Fitbit is demonstrating it’s not content to rest on its laurels, will continue to be innovators — and is making the right moves to maintain its dominance.
Fitbit Stock Daily Chart
Fitbit stock has come a long way since being one of the most anticipated IPOs of 2015. Unfortunately for holders of FIT, the daily chart activity tracker shows the price action has amounted to an extreme loss in shareholder value, with Fitbit stock now trading just off freshly notched all-time lows.
Technically, the good news is Fitbit stock could be establishing a lower-low, double-bottom pattern. Over the past several sessions, shares of FIT stock have broken below their opening day and prior all-time-low of $29.50 to trade in a lateral consolidation pattern approximately 10% wide.
A reversal move back above $29.50 from current levels would confirm a pattern low as being in place and, optimistically, provide technical incentive for Fitbit stock to rally strongly into an uptrend.
Less optimistically, Fitbit stock could always break below its current congestion pattern and continue to seek some other type of bottom while establishing new lows in shares of FIT. With the potential for overhead supply, this simply can’t be ruled out.
Fortunately, there’s a way around this conundrum in Fitbit stock using a bull put spread.
Fitbit Stock Bull Put Spread
The December $25/$23 bull put spread for a credit of 55 cents or greater looks attractive. The effective purchase price is $24.45 and represents a discount of 10% compared to the current Fitbit stock price if the trader were ultimately assigned and the short put converted into long FIT stock.
Should Fitbit stock finish above $25 at expiration, the full credit is received representing income of 55 cents or 2% of FIT in just more than three weeks’ time.
Conversely, if FIT stock is below $25 the trader can, as discussed, become a Fitbit stock owner at $24.45 through the assignment process. But, it’s actually even better than that because of the spread’s protective long $23 put.
Due to spread’s defined risk, the trader is always able to exit the position for a loss of no more than $1.45, which is the distance of the two strikes minus the initial credit. Thus, even if FIT were to hypothetically trade to $15 by December expiration, the most the trader can lose is $1.45, not $9.45 defined by the vertical’s breakeven of $24.45 minus the $15 Fitbit stock price.
Taken a step further, if the trader is still bullish with Fitbit stock at $15 and wishes to go long FIT, the effective purchase price for the spread trader would be $16.45. Thus, traders can get a pretty terrific deal without having to time a bottom.
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
