Shares of GoPro (GPRO) suffered through yet another drubbing yesterday, dropping 5% to close at a new all-time low of $19.81 following a downgrade by Piper Jaffray analyst Erinn Murphy.
Murphy lowered her price target on GoPro stock from $20 to $15, citing margin pressures and lack of new products as reasons for the downgrade.
After reaching all time high of $93.85 on Oct. 7, 2014, the GoPro stock price has fallen nearly 80% from those lofty levels, now trading well below the IPO price of $24. The company’s latest earnings report was a disaster, with GPRO falling short on both the top line ($400.3 million versus $433.6 expectations) and the bottom line (25 cents versus expectations for 29 cents).
There are some glimmers of hope, however. Yesterday’s price action was encouraging, with GPRO rallying 5.03% off the intra-day low of $18.86. This dragonfly doji pattern, with the stock rebounding sharply off the lows to close neat the opening levels and the highs of the day, is many times an indication that the selling may be exhausted.
GoPro Stock Chart
GPRO stock is also deeply oversold, with a 9-day RSI of 21.87 and a 14 day DPO of -7.4, both of which are extreme readings.
GPRO did authorize a $300 million share buyback program, which could provide some well-needed support for GoPro stock. GPRO is also cash-flow positive, with estimates for EPS of $1.32 next year.
While I don’t look for GPRO to rip to the upside anytime soon, I do look for a valuation floor to be put in GPRO stock. With implied volatility heightened due to the recent carnage, option selling strategies are favored.
Using January 2016 expiration, I would look to sell the GPRO Jan $15 puts and buy Jan $13 puts for 30 cents net credit, while simultaneously selling the GPRO Jan $24 calls and buying the GPRO Jan $26 calls for a similar 30-cent net credit.
The short put strike of $15 equates to a P/E ratio of roughly 11, while the short call strike is positioned at the IPO price of $24.
The break-even points are $14.40 and $24.60, providing a 27.31% downside cushion and a 24.18% upside cushion. Maximum gain on the trade is the 60-cent net credit, while maximum loss is $1.40, with a 42.86% return in risk.
In order to limit losses, I would exit the position if either spread goes fully in the money. If GPRO stock closes between $15 and $24 on January expiration, both spreads expire worthless, and the initial credit is pocketed.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can e-mail Tim at tbiggam@deltaderivatives.com.
