I have been a longtime critic of GoPro Inc (NASDAQ:GPRO), especially when Wall Street was enamored with it. However, I have successfully traded GPRO stock from the long side, happy to take a speculative stance.
I have no disillusions that Wall Street will once again see value in the stock over the long-term. But I reserve my bets — and yes, they are bets! — to short-term trades against price action.
Wall Street seems to fall in and out of love with GPRO stock. Last May, shares rallied by nearly 100%. Unfortunately for the bulls, it consequently peaked in October and gave back everything (and more).
Today’s trade will be a rinse-and-repeat, knowing I have profits in my pockets from previous wins.
Fundamentally, GoPro is a camera company, so no one should have any disillusions of other potential (see: drones). At its top, investors talked about GoPro being the YouTube killer, but reality had other plans. After a series of flubs with regards to inventory control and market timing, GPRO now sits at a mere fraction of its all-time highs.
Technically, GoPro stock has had a few constructive candles after its ugly move on Friday, June 16. Now bulls and bears are likely to battle it out over a long-term pivot level. The $8.40 to $8.60 zone served as support, but then was lost on March 6 of this year. It has since served as a roof. But the bulls look like they want to give it another go.
Today’s trade is pure a gamble that the recent lows will hold for the rest of the year. This is not me endorsing the current valuation. In fact, if Snap Inc (NYSE:SNAP) stock rebounds, it could siphon away potential bids since they are both “camera companies.” (Don’t take my word for it; just ask Snap’s management.)
Sure, SNAP fans can argue that there are differences between the two companies, but most investors don’t really care. If I am betting on GPRO, I don’t want to also bet on SNAP, and that’s why I believe they compete for bids in the stock market.
I don’t want to chase price targets and I don’t want to invest hoping for a buyout headline. Instead, I want to use GoPro options to generate income. To do this, I need to sell downside risk below levels that are likely to hold as support. Otherwise I will end up owning the shares and will have to manage that risk for minimal damage.
How to Trade GPRO Stock
The bet: Sell the Oct $7 put and collect 55 cents per contract. Statistically, this is close to a coin flip, but I already labeled this trade as speculative. If GoPro falls below my strike, we will own the stock and suffer losses below $6.45.
Selling options is risky, so only risk what you’re willing to lose. That said, we could mitigate the risk by using a bull put spread instead of selling naked puts.
The alternate bet: Sell the Oct $7/$6 credit put spread, where we have the same chances of success but with limited risk.
There isn’t too harsh of a compromise here, since the spread can yield 35% on risk. Compare this with buying GPRO shares and hoping for a 35% rally just to match the performance of the spread.
Actually, forget it. There’s no comparison.
Learn how to generate income from options here. 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.
