Fitbit (FIT) Rallies on Alibaba Pact; Calls Hot

Fitbit Inc (NYSE:FIT) is looking to expand in China with help from Alibaba Group Holding Ltd (NYSE:BABA)

by Josh Selway

Published on Apr 28, 2016 at 11:29 AM
Updated on Jun 24, 2020 at 10:16 AM

Wearable tech stock Fitbit Inc (NYSE:FIT) is on the rise today amid heavy volume, gaining 3.4% at $18.48, and on pace for its best close since Jan. 22. Sparking the rally, the company signed a memorandum of understanding (MoU) with e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA) to help FIT expand in China by giving it a bigger presence on BABA's Tmall.com shopping site. FIT has already added 55.2% since it bottomed below $12 in late February, but it seems options traders believe the tech stock has more room to run. 

FIT call options are trading at more than six times the rate of puts, and account for the 10 most popular strikes today, with short-term contracts in vogue. More specifically, the weekly 4/29 and 5/6 series are seeing heavy attention. In the 4/29 series, it looks like traders are opening long positions at the 17.50-, 18.50-, and 19-strike calls, betting on extended gains from FIT before the options expire at tomorrow's close. The 18- and 20-strike calls are popular in the weekly 5/6 series, with these seemingly bullish traders giving the stock an extra week to muscle higher -- perhaps anticipating an earnings beat.

This bias toward calls is nothing new among FIT speculators, though. In fact, over the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more than five calls have been bought to open for every put. Meanwhile, the stock's Schaeffer's put/call open interest ratio (SOIR) sits at 0.55, meaning call open interest nearly doubles puts open interest among contracts set to expire within three months. 

Elsewhere, while analysts have been warming to the stock in recent weeks, there's still heavy pessimism surrounding FIT on Wall Street. This is evidenced by recent short interest reports, which reveal short interest climbed over 16% during the past two reporting periods. It would now take FIT shorts almost four days to cover their positions, at the stock's average daily volumes. 

This suggests at least two things. First, some of the recent FIT call buyers may be short sellers using options to hedge their positions. Second, an extended rally could drive some of the unhedged bears to cover, leading to a short-squeeze situation. This thought is particularly interesting, considering Fitbit Inc (NYSE:FIT) is scheduled to release earnings next Wednesday evening -- meaning the stock could be on the verge of another outsized move.

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