After the close of trading tomorrow, all eyes turn to GoPro Inc (NASDAQ:GPRO) as the company steps up to release its second-quarter earnings report amid a worsening sentiment backdrop.
Implieds suggest a post-earnings move of about 13%, which could send GPRO stock back into the single digits on a negative reaction.
That said, with the right trading strategy, there is a profit to be made from tomorrow’s earnings report.
GPRO Stock Surrounded by Bears
Taking a look at the numbers, Wall Street is expecting a loss of 58 cents per share on revenue of $194.31 million from GoPro, down sharply year-over-year. Sales continue to struggle, as smartphone technology improves, narrowing the niche for GoPro’s Hero camera line.
According to EarningsWhispers.com, GoPro’s Q2 whisper number comes in at a loss of 62 cents per share — a wider loss than the consensus calls for. While over at Zacks, GoPro stock has attracted just six “buy” ratings, compared to nine holds and two “sell” ratings.
The worst of GPRO’s bearish sentiment, however, comes from the short-selling community, which has ramped up its positions in recent weeks. Specifically, the number of GPRO shares sold short rose by 11% in the most recent reporting period, and now totals 29.7 million shares. That’s more than 35% of the stock’s total float!
A quick peek at options activity shows us that the short sellers aren’t taking any chances. The GPRO weekly July 29 series put/call open interest ratio arrives at a rather bullish 0.49, with calls more than doubling puts among near-term options. However, the August put/call OI ratio tells a much more negative tale, arriving at 1.44.
In other words, most of the weekly call OI is likely related to short sellers hedging their bets, and not options traders looking for a GPRO rally.
Click to Enlarge Overall, weekly July 29 series implieds are pricing in a potential post-earnings move of about 13%. This places the upper bound at $12.97, while the lower bound lies at $10.03. A breach of $10 would bolster existing bearish sentiment and embolden short sellers, while a rally still leaves GPRO stock well shy of technical resistance in the $13.50 to $14 range.
Historically, GPRO stock has not performed well following the company’s trips to the earnings confessional.
In the past two years, the shares have sold off six times following GoPro’s quarterly earnings report. What’s more, GPRO stock has shed roughly 9%, on average, in the wake of these reports.
2 Trades for GPRO Stock
Put Spread: GoPro’s earnings-reaction history, combined with poor earnings expectations and a bearish sentiment backdrop does not bode well for GPRO stock. As such, traders looking to bet against GPRO ahead of earnings may want to consider an Aug $10/$11 bear put spread. At last check, this spread was offered at 41 cents, or $41 per pair of contracts. Breakeven lies at $10.59, while a maximum profit of 59 cents, or $59 per pair of contracts, is possible if GPRO closes at or below $10 when August options expire.
Call Sell: If betting directly against GPRO stock makes you nervous, a weekly July 29 series $14 strike call sell position may fit the bill. Such a trade is especially useful if you already own GPRO stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $14.
At last check, this option was bid at 12 cents, or $12 per contract. A sold call allows you keep the premium as long as GPRO stock closes below $14 at expiration. On the downside, if GPRO rallies above $14 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
