In spite of my long-term criticism of GoPro Inc (NASDAQ:GPRO), I profited from trading its stock from the bullish side. That’s because I trade without emotions, especially when it comes to GPRO.
I don’t like to chase performance and GPRO has earnings momentum. Although I don’t trust its management, I am willing to bet on its stock price action for the near term.
However, I will not buy the stock when it’s up 20% in one day. Instead I will sell puts for for income. This way, I won’t need the rally to continue in order to profit and I can build room for error.
Fundamentally, I hated and shorted the GPRO enthusiasm that took it to $90 per share under false hopes. Now that it’s in the single digits, I find it easier to bet go long in short bursts. All that matters is momentum.
I can’t argue furtively for management operational successes. It seems that they often find ways to disappoint Wall Street. There were issues of product timing and inventory. Don’t confuse this with me dissing the product. I think GoPro cameras are cool — I have two of them — I just don’t believe in management’s consistency in execution.
Click to Enlarge Until then, I simply trade its price action, not its valuation. GPRO stock was tight into earnings. So last week’s spike could be a sustainable break to the upside. For the past few weeks, it set higher lows knocking on a resistance area.
When the bulls prevail, they overshoot higher. What was resistance often becomes support, more importantly, and therein lies my opportunity.
I won’t buy GPRO stock and hope this breakout continues, though. Instead, I will use GoPro’s options market where I risk nothing and profit from support.
Essentially, I will sell downside risk below support in GPRO stock. As I choose strong levels, the trade should be a boring success. I choose that word carefully, because boring is beautiful when selling premiums.
Today, I’m betting that GPRO stock will not fall below $7 through December. If it does I have to own it and risk losses below $6.50.
GPRO Stock Options
The Bet: Sell GPRO Jan $7 put and collect 50 cents to open. Here I have a 75% theoretical chance of success. I can mitigate the risk of selling naked puts by selling spreads instead.
The Alternate Bet: Sell GPRO Jan $7/$6 credit put spread where I have about the same odds of winning, but with much smaller risk. Then the spread would deliver 18% in yield.
In either trade, GPRO can fall 28% from here and I can still win. Still, I don’t risk more than I am willing to lose, and neither should you.
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.
