Fitbit Inc (NYSE:FIT) reported earnings last night and the market hated it. They missed on expectations and slashed forward guidance so now the stock has but a sliver of its IPO valuation and capitalization. The knee-jerk reaction on the headline was down 18%. So it’s going to zero…
Not so fast. Today I go long Fitbit stock with caution for one more go. For now, it’s best to let the hate rain so we can exhaust the sellers quickly.
Usually I start my bullish trade write-ups arguing for value or potential support levels, but this FIT report reaction obliterated all of my go-to thesis methods except for price-to-book. Its P/B is 1 and that gives me some semblance of value against which I can place my bet.
Don’t look to the experts on Wall Street for guidance. They are no help since it is now trading below the lowest of their price targets. Besides most of them have a hold rating on FIT stock, so they have no idea what to do. So I will place my bullish bet today based largely on the price action.
Emphasis here on the word “bet.”
No, I am not delusional that FIT has better days ahead. I am not one to buy hopium. But I am one to bet that if management can’t figure out its own business, someone else will. I see too many of their gizmos on the streets to expect that the company will disappear into the sunset with so much cheap money in the hands of corporations. Today’s trade setup is a pure bet that FIT is setting new lows but it will eventually find a bottom.
I am a fundamental trader, but here there is no tangible value to gauge where I want to place my risk. And when that happens I rely on the technicals. But here too FIT stock is setting new lows so it’s undiscovered territory.
So I am placing my risk as low as I can, where I still can collect a meaningful reward. The elevated levels of risk mainly the CBOE Volatility Index (INDEXCBOE:VIX) add to the potential bounty as it inflates the premiums of all options including those of FIT.
I said that I am a fundamental trader, so I consider this a purely speculative trade inside a conservative portfolio. To clarify this statement even further, I am risking an amount of money that, if lost, won’t break my heart or my piggy bank.
If the price moves against me, I will end up owning the shares at a discount from here. Then there is a good chance I would be able to manage out of them without tremendous damage. If I were already long Fitbit stock, I would skip this trade and would not average down. As a general rule, adding to losing trades only would make them a larger problem.
Fitbit Stock Trade Idea
The Bet: Sell the FIT AUG $4 put. This is a bullish trade for which I collect 50 cents to open. I have a 65% certitude that I will retain maximum gains. But if the price falls below my strike then I own shares. I would then need to manage off my break-even point of $3.50.
Selling naked puts carries big risk especially for a stock as frothy as FIT. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the FIT AUG $4/$3 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 30% if successful.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
