Shares of GoPro (GPRO) stock might finally have seen a glimmer of hope following a 17% post-earnings selloff Oct. 28 and a nearly 62% drop since the early August highs.
Click to Enlarge GoPro stock put in a technical reversal on Monday, trading down 2.8% on the open to a new all-time low of $24.30 before rallying sharply to close 2.2% higher on the day at $25.55.
This came two days after a disappointing earnings report, with GPRO missing on both the top and bottom line. GoPro reported revenues of $400.3 million, an improvement of 43% but still shy of analyst consensus estimates of $433 million. Earnings per share came in at 25 cents per share, also well short of projections of 29 cents.
Guidance was lowered substantially, with GoPro officials now seeing Q4 earnings in a range of 35 to 45 cents with revenues of $500 to $550 million, compared to earlier guidance calling for earnings of 82 cents per share on revenue of $690 million.
GPRO did increase gross margin to 46.8% versus last quarter’s 46.4% rate, with overseas revenue showing a gain of more than 175% annually. In particular, China showed strong demand, which helped offset the drop in U.S. based sales. GPRO also announced a $300 million buyback program, which is about 8% of shares outstanding.
While GoPro stock is still below the low of $28.65 on the first day of trading, it has managed to stay above the IPO price of $24. The buyback program should also help defend the IPO level of $24. While growth has certainly tempered, the current forward P/E multiple of 13 is certainly a far cry from the previous nosebleed multiple of over 100 when GPRO was trading in the high $80s.
At current levels, GoPro stock is looking like it may have found some fundamental and technical support. With shares still hard to borrow, puts carry a higher level of implied volatility compared to calls, setting up several long trade possibilities using options.
Trade 1: Sell GPRO Puts
Click to Enlarge As you can see in the option montage, the calls are trading at a mid-50% level of implied volatility, while the puts carry a much richer IV in the upper 60% range, providing a little more edge when structuring the trade.
One idea is a simple put sale, selling the Jan $20 puts at 80 cents. This positions the put seller to be a buyer of GPRO stock at $19.20, or 24.85% below the GPRO closing price of $25.55, if GPRO is below $20 on January expiration.. The seller would keep the premium if GPRO stock is above $20 on January expiration for a return on risk of 4.17%.
Trade 2: Synthetic Long Position
A second idea is to go long the Jan $25 combo, buying the Jan $25 calls and selling the Jan $25 puts. This is a synthetic long stock position, but because of the fact that puts are trading at a higher IV level than the calls, the buyer of the combo is able to effectively get long GPRO shares at a discount. With the Jan $25 calls and puts both trading at the same price, the buyer of the Jan $25 combo will be long GPRO stock at $25.00 at January expiration, versus the current stock level of $25.55, providing a 2.15% discount to the combo buyer.
Trade 3: GPRO Put Spreads
A third alternative is a defined risk put credit spread, selling the Jan $20 puts and buying the Jan $17 puts for a 53 cent net credit. The short Jan $20 strike is 22.20% out-of-the money, with a maximum risk on the trade of $247 per spread. The maximum gain is the initial net premium received of $53 per spread, with a 21.45% return on risk.
So for investors and traders looking to get long GoPro stock, the options market may provide several more effective alternatives.
As of this writing, Tim Biggam had no position in the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can e-mail Tim at tbiggam @deltaderivatives.com.
