Friday saw enormous call volume in shares of GoPro (GPRO), with 27,642 of the Jan 2017 $40 calls trading vs. only 3,388 in put open interest. The buyer of these call options paid $1.55, meaning the total dollar value of the trade was $4.18 million.
Click to Enlarge With GoPro stock closing at $19.50, these $40 strike calls need GPRO to more than double by January 2017 to be in the money. Certainly, this trader is positioning for some big upside in GPRO.
With GoPro stock down nearly 67% this year as of its last close, shares are becoming somewhat more attractive on a fundamental basis, currently trading at 16.6 price-earnings.
Friday’s price action in the stock was encouraging on a technical basis as well, with GPRO moving higher by 8.64% on an overall bad day in the markets.
With 20-day RSI finally turning positive after being mired around 30, the heightened levels of implied volatility provide a bullish outlook from a contrarian standpoint.
The bullish hammer formation created on Dec. 4, with GPRO shares making new all-time lows only to reverse and close significantly off the lows, also reinforces the notion that the selling may be exhausted.
It is important to understand that the big buying in the Jan 2017 $40 calls drove the implied volatility — and IV is just another way to say the price of the option — of these calls sharply higher. On Thursday, these calls closed at a 64.52% IV, while on Friday the buying pressure drove the IV all the way to 71.85%.
The table below shows the comparative pricing of GPRO Jan 2017 $40 calls.
| Date | Stock | Jan 40 C | Delta | IV | BW | BW Delta |
| 12/18/2015 | 19.5 | 1.65 | 0.26 | 71.85% | 17.85 | 0.74 |
| 12/17/2015 | 17.95 | 0.96 | 0.19 | 64.86% | 17.00 | 0.81 |
| 12/2/2015 | 20.09 | 1.30 | 0.22 | 61.99% | 18.80 | 0.78 |
| Change | -0.59 | 0.36 | 0.04 | 9.86% | -0.95 | -0.04 |
| Expected Change | -0.46 | |||||
| Edge | 0.48 | |||||
| Percent Edge | 2.72% |
Interesting to note that on Dec. 2, GPRO stock closed at $20.09 and the Jan 2017 $40 calls closed at $1.30; while on Friday, with GoPro stock lower by 59 cents at $19.50, these same calls closed higher at $1.65, even with 16 trading days having passed.
How to Trade GPRO Stock
The best way to capture the opportunity to buy GPRO lower and sell the calls higher is a covered call trade, buying shares of GPRO and selling a GPRO Jan 2017 $40 call for every 100 shares purchased.
This positions bullishly along with the big call buyer, while capturing the huge spike in IV.
The covered call trade is net long 74 deltas and has a 2.72% edge, according to our proprietary edge calculation.
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 email Tim at tbiggam@deltaderivatives.com.
