GoPro Inc (NASDAQ:GPRO) lost its luster around $90 per share. I hated it then and I was correct calling GPRO stock the short of the year. It’s a little more attractive at these levels, but still far from a sure thing.
Click to Enlarge GoPro’s brand has many fans, but shares of GPRO lost most of its fanatics. Proof of it is that shares are down 20%-plus year-to-date in a market that has seen several record highs.
Fundamentally, the company has admittedly had a few flubs from which it is trying to recover. Technically, GPRO stock is precariously hovering above a must-hold level.
This is especially dangerous, as the week started with speculation that the company is still executing badly. Losing $13.60 per share could invite sellers down to $12.50 per share and maybe even test the $11 mark.
This is not a forecast for downside trajectory, but GoPro bulls need to recognize the dangers that loom especially going into earnings. Management will have the chance to infuse the GPRO stock price with a good story in a couple of few weeks on Nov. 3. Until then, longs need to be cautious.
The options markets allow for several ways to go long stocks cautiously. One way is to buy calls or call spreads. GPRO premiums are elevated but still attainable for most investors. Here is a pair trade that would reward me if GPRO doesn’t disappoint on earnings.
Trading GPRO Stock
Trade #1 – The Bet: Buy the GPRO Nov $15/$16 debit call spread. This is a bullish trade for which I pay 23 cents to open. This is my maximum loss. If GPRO rallies past both legs of my spread then I stand to gain 77 cents per contract.
I almost always like to lower my out-of-pocket risk. Here I can do this by selling risk below current levels to generate potential income. I have to be careful here since earnings could move GPRO stock violently in an unpredictable direction.
Trade #2 – The Bank: Sell the GPRO Jan $10/$9 credit put spread. This is also a bullish trade for which I collect 20 cents per contract. To be successful, I need GoPro shares to stay above my spread through its expiration. If successful, I get to keep the premium collected. This would be 25% yield on the money risked.
Since trade No. 1 is almost fully financed by trade No. 2 (as long as GPRO stays above $10 through January), any premium I collect from selling the debit call spread (trade No. 1) would be pure profit. This could happen even if GPRO does nothing exciting on earnings.
When selling credit put spreads, I have to choose levels that are low enough to avoid them being breached. Here, I chose a level where I believe GPRO would find buyers even if it falls to it by January.
I am not required to hold these trades through their expiration. I can close either at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
