Will Fitbit Inc (FIT) Burn Bears on Earnings?

Options traders and short sellers have been betting heavily against Fitbit inc (FIT) ahead of earnings

Nov 1, 2016 at 3:10 PM
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After the close on Wednesday, fitness tracker producer Fitbit Inc (NYSE:FIT) will report its sixth ever quarterly earnings report since the stock began trading publicly. Heading into the event, traders have taken a distinctly downbeat approach to the stock, which is down 1.7% at $13.03 today. And while history is on the side of the bears, a positive surprise could send quite a few of these pessimists packing.

Technically speaking, FIT has been a long-term disappointment, peaking less than two months after its trading debut, then falling hard. In 2016 alone, the shares have dropped 56% of their value, and in recent weeks FIT has been running into trouble at the previously supportive $14-$14.50 level. On the positive side, the $12.50-$13 region has been supporting the stock since July.

The current sentiment backdrop suggests expectations for the equity are low, to say the least. Options traders have been picking up FIT puts relative to calls at a faster-than-usual clip in recent weeks. In fact, the stock's 10-day put/call volume ratio of 0.77 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks higher than 82% of the past year's readings.

Today FIT options are trading at roughly their normal intraday pace, with calls doubling puts. That doesn't mean bulls are taking control, however. The most active option is the November 14.50 call, where it appears one trader sold to open a block of 1,500 contracts. By selling to open the calls, this speculator is betting on the $14.50 level continuing to serve as a ceiling for FIT in the coming weeks.

Outside of the options pits, short sellers have been piling on. These bearish bets rose by 19.3% during the most recent two-week reporting period, and, with more than 59 million shares shorted, currently represent a record high. In fact, the 44.3% of FIT's total float sold short would take roughly eight days to cover, at the stock's average daily volume.

Analysts have been somewhat kinder. Just over half of those tracking FIT maintain a "buy" or better rating. Plus, the average 12-month price target of $20.88 sits in a region not seen since January. On the other hand, this means the door is wide open for future downgrades and/or price-target cuts.

From a historical perspective, bearish traders seem to be on the right side of things. After all, Fitbit Inc (NYSE:FIT) has made a move to the downside in the session subsequent to reporting earnings in four of the five previous quarters. These haven't been insignificant drops, either; the average one-day post-earnings move in either direction clocks in at 15%. Presently, the options market is pricing in an even wider 18.5% move for Thursday. However, should FIT pull a repeat of the most recent quarter -- when a strong earnings result sent the shares 13.4% higher in a single session -- an unwinding of the existing bearish bets on the stock could create tailwinds.

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