In the past few years, we’ve had a few high-profile initial public offerings that turned out to be duds. Fitbit Inc (NYSE:FIT), GoPro Inc (NASDAQ:GPRO), Twitter Inc (NYSE:TWTR) and more recently Snap Inc (NYSE:SNAP) are atop my list. At one point or another, all four stocks rallied to insane levels … and all of them are now but a fraction of their respective highs. Today, I’m setting my sights specifically on FIT stock.
Before I go any further, hold the hate mail. These IPOs are stinkers only because of their price action; I happen to like and enjoy many of their offers.
I’m putting my emotions aside, however, so I can profit from the price action. The current bet on my radar is a trade alongside Fitbit stock bulls to create income out of thin air. My plan is to generate income using the quadruple bottom in FIT’s recent price action.
Fundamentally, FIT stock has challenges, but no signs of imminent threat of further deterioration. I do worry a little about the long term; it’s never a good thing that your competitor is Apple Inc. (NASDQ:AAPL). Tim Cook has virtually unlimited resources which makes him a dangerous foe. Apple can leverage their wide install base to give their watch a sustainable advantage against Fitbit’s offerings.
Fitbit is striking back. Yesterday, the company announced a cadre of new offerings, most importantly the Ionic smartwatch — a long-awaited challenger to Apple Watch’s dominance. Whether it’s successful remains to be seen, but the company’s fitness bands weren’t doing the job.
Fitbit management also has some advantages. The company’s early-mover status helped establish a sizable footprint. Its ubiquity is something FIT can leverage for future home runs. And personally, I still like their slim bands for use at the gym as opposed to a full-sized smartwatch.
Click to Enlarge Technically, FIT stock doesn’t look so good, with shares off 19% year-to-date. But 2016 was even worse. And it’s not all bad news on the charts. Fitbit stock has successfully defended the $5 mark since May 2017.
Also, the price action of late has been construction, even showing potential technical upside. This may not be a guarantee that the rally off the quad-bottom will continue, but it is encouraging.
My thesis is that Fitbit shares will stay above $5 at least through January 2018. I’m not betting on improving fundamentals; I’m merely betting that the lows have come and gone for now.
How to Trade FIT Stock
The bet: Sell the Jan 2018 $5 put and collect 50 cents per contract. This is a bullish trade that has a 75% theoretical chance to win. But if Fitbit shares fall below $5, I’ll be forced to own them. If they fall below $4.50, I’ll start to accrue losses.
If you prefer a smaller margin requirement, you can sell spread instead.
The alternate bet: Sell the Jan 2018 $5/$4 credit put spread. This spread has about the same odds of success and will yield 25% if it wins.
In either setup, I don’t need a rally in Fitbit stock to win. I’ll retain maximum gains as long as FIT stays above $5. This is a calculated risk where I build myself a 15% buffer for the next few months.
Investing in the stock market never is no guarantee. That’s why you should never bet more than you can afford to lose.
Learn how to generate income from options 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.
