Shares of GoPro Inc (NASDAQ:GPRO) popped more than 9% after the company set the launch date for the GoPro Omni — a 360-degree camera.
The shares tagged a seven-month high as a result, but follow-through buying has failed to materialize. In fact, GoPro stock has once again pulled back to the $15 area, as selling pressure pulls the shares back to Earth. For options traders, this short-term pop opens up some interesting opportunities.
Technically speaking, GoPro stock has gone on an impressive run since May, gaining more than 68%. But the rally has taken GPRO to some lofty heights heading into the holiday shopping season — heights not justified by GoPro’s lackluster performance in the same period last year.
Click to Enlarge As evidence, GPRO is once again struggling with resistance in the $15-$16 region — an area that has rejected GoPro stock multiple times since January.
Furthermore, the shares’ recent run has put them in overbought territory, even after the pullback from Monday’s highs.
And … there’s potential for the situation to get worse. According to data from Zacks, 13 of the 15 analysts following GoPro stock rate it a hold or better, compared to only two sell ratings. Additionally, the 12-month price target of $12.10 represents a roughly 25% discount to the stock’s current trading range.
In other words, GPRO is at risk of valuation downgrades over the short-term that could set the stock reeling.
Elsewhere, short interest is on the rise again, with the number of GPRO shares sold short jumping 14% in the most recent reporting period. As a result, nearly 31 million shares of GoPro stock are now sold short, representing about 36% of the stock’s total float.
While this short-to-float ratio is high, the risk of a squeeze situation is minimal given GPRO’s waning technical strength following Monday’s rally. In fact, the pullback from technical resistance may embolden short sellers, leading to additional downward pressure on the shares.
On the options front, traders have grown more bearish since Monday. GoPro stock saw a spike in call buying following Monday’s news, but puts have since taken over, with the September put/call open interest ratio rising to a perch of 0.71.
Overall, September implieds are currently pricing in a potential move of more than 13% for GoPro stock. This places the upper bound at around $17.01, while the lower bound lies near $12.99.
2 Trades for GoPro Stock
Put Spread: With GoPro stock retreating from overhead resistance, the potential for valuation downgrades and rising short interest, the path of least resistance appears to be lower. Traders looking to fade the recent rally in GoPro stock might want to consider a Sept $15/$13 bear put spread.
At last check, this spread was offered at 72 cents, or $72 per pair of contracts. Breakeven lies at $14.28, while a maximum profit of $1.28, or $128 per pair of contracts, is possible if GPRO closes at or below $13 when September options expire.
Call Sell: If a more neutral-to-bearish stance fits your trading style, then a Sept $19 strike call sell position may fit the bill. Such a trade is especially useful if you already own GoPro 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 $19.
At last check, this option was bid at 11 cents, or $11 per contract. A sold call allows you keep the premium as long as GoPro stock closes below $19 at expiration. On the downside, if GPRO rallies above $19 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.
