Say ‘No’ to GoPro Before Earnings (GPRO)

If you have a stomach for risk, consider this bearish options spread

Since going public earlier this month, sport-camera company GoPro (GPRO) has been a hot topic on Wall Street. As such, the buzz heading into the company’s first quarterly report as a publicly traded company is reaching a fever pitch.

gopro grpo stockAnalysts are targeting GoPro earnings 7 cents per share, excluding items, according to FactSet, while revenue is seen coming in at $238 million.

Despite the hype, many on Wall Street are starting to have reservations about this upstart camcorder firm, which could mean an opportunity for savvy options traders.

Currently there is no whisper number for GoPro earnings, and analysts have been hesitant to cover the firm. According to Thomson/First Call, only three brokerage firms have offered up a rating on GPRO stock — and all are wishy washy, doling out three “hold” ratings. Meanwhile, GoPro stock is trading right at fair value, according to the 12-month consensus price target of 46.50.

Why the reservations?

According to a research note by analysts at JPMorgan, GoPro is facing a declining camcorder market as phones become significantly more sophisticated. Additionally, the price of GPRO cameras and the fickle nature of its target social media market could limit the company’s growth and staying power.

Short sellers appear to be taking similar concerns to heart. During the most recent reporting period, the number of GPRO shares sold short skyrocketed from just 3,000 shares to more than 5.3 million.

That said, it appears that some short sellers might be taking precautions to hedge their bets. Currently, the weekly Aug 2 put/call open interest ratio arrives at 0.65, hinting that GRPO call options are popular heading into tonight’s quarterly report. Pulling back for a broader looks reveals that call open interest falls off for the rest of August, with the front-month put/call open interest ratio rising to 0.77.

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Technically speaking, GPRO stock has surged some 87% since its initial public offering on June 25. Most of those gains, however, took place in the first week, with GPRO flatlining since. The stock has strayed little from its trading range in the $40-$46 area, with downside concerns emerging in the middle of July when GPRO stock pulled back to $36.

GoPro stock is now trading near the top end of its range, and appears to be a bit overbought heading into tonight’s report.

Overall, weekly Aug. 2 implieds are pricing in a potential post-earnings move of about 5% for GPRO stock. This places the upper bound near $51.60, while the lower bound lies at about $41.30.

Options Trade on GPRO Stock

For those with the stomach for risk, a bet against GPRO stock might make sense at this point, especially given the hype and the concerns regarding the company’s future profitability. As such, an Aug $41/$46 bear put spread has good prospects.

At the close of trading on Wednesday, this spread was offered at $2.42, or $242 per pair of contracts. Breakeven lies at $44.58, while a maximum profit of $3.58, or $358 per pair of contracts, is possible if GPRO closes at or below $41 when August options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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