Fitbit Inc (FIT) Bear Gap Deals a Blow to Put Sellers

Fitbit Inc (NYSE:FIT) is fresh off a new record low, after the company reported disappointing preliminary earnings numbers

Jan 30, 2017 at 3:06 PM
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Shares of Fitbit Inc (NYSE:FIT) have plummeted 17.3% to trade at $5.97 -- fresh off a record low of $5.95 -- after the wearable tech firm reported preliminary fourth-quarter earnings that fell short of its previous forecast, and announced it would layoff roughly 6% of its workforce. Adding insult to injury, Mizuho and Deutsche Bank slashed their price targets on the stock. While FIT is short-sale restricted today, two-fifths of the stock's float is already sold short, meaning today's gap lower is likely being met with cheers from this bearish bunch. Nevertheless, one group of options traders is feeling the heat today -- namely, put writers who had set a near-term floor at the site of FIT's previous lows.

Taking a quick step back, short-term options traders are more put-skewed than usual toward FIT, per the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.85 -- in the elevated 76th annual percentile. What's more, the equity's gamma-weighted SOIR is docked at a top-heavy 1.11, meaning near-the-money puts outweigh calls among options set to expire in three months or less.

This metric measures both buy- and sell-to-open activity, and according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more short puts than long ones have been initiated in recent weeks. Specifically, traders at these major exchanges have sold to open six puts for each one they've purchased in the past two weeks.

Drilling down on the front-month series, FIT's February 7 strike is home to peak put open interest of 8,044 contracts outstanding. Data from both Trade-Alert and the major options exchanges indicates a number of these positions were initiated at the hands of put writers, meaning speculators were expecting FIT to remain north of $7 -- a level that served as a floor earlier this month -- through expiration at the close on Friday, Feb. 17.

In this best-case scenario, the puts would've expired worthless, and the traders could have pocketed the initial premium collected as their full reward. However, with these puts now comfortably in the money, these put writers are staring at steep losses. This includes the risk of assignment, in which they will have to buy shares of Fitbit Inc (NYSE:FIT) at $7 per share -- a premium to the stock's current perch.

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