Fitbit Inc (NYSE:FIT) is similar to GoPro Inc (NASDAQ:GPRO) in that their stocks came out of the gate running, but both are highly dependent on one concept that has a fairly low barrier to entry. Thus, FIT stock and GPRO alike are vulnerable — especially to new competition from larger companies with deeper pockets.
Fitbit does have the advantage of being a first-to-mind name and one of the earliest entrants, thereby carving a niche for itself and a cult-like following. But how much longer can the company sustain this?
GoPro’s “hopium” lifted its stock to amazing highs, but the bubble burst in a big way. The bubble in FIT stock burst much closer to its initial public offering, and its shares are now but a fraction of the highs.
Going forward, the fundamental bets cannot be ones that try to capture massive rallies. Today I want to share a speculative trade that doesn’t require Fitbit stock to thrive, but merely survive. If it avoids setting new lows, we’re good.
The thesis is simple: Will FIT stock survive the year without any major debacles? I can sell risk below a level that would be support for the year.
Click to Enlarge Technically speaking, Fitbit is trying to fill the gap from $7, but even if it gets it done, that level is pivotal, so it could present a challenge.
How to Trade FIT Stock
The bet: Sell the Nov $5 put and collect 50 cents per contract to open. This is a bullish trade that requires Fitbit shares to stay above my strike sold for complete success. Otherwise, I am open to losses below $4.5 per share.
Selling naked puts is not for everyone, so I can modify this trade to be a credit put spread instead. This way I won’t be committed to buying the stock if it falls below $5.
The alternate: Sell the $5/$4 credit put spread. Both trades have 75% theoretical certainty of success but the spread has a limited risk profile. If successful, the alternate trade would still yield 18% on risk. Compare this with buying FIT stock here and needing it to rally 18% to match this setup.
My trade does not need a rally. I can profit even if Fitbit stalls as long as it doesn’t correct more than 22% in the next few months.
E-mail sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
