On an overall bad day in the market to start the New Year, GoPro (GPRO) stood strong on Monday, moving higher by 3.78% to close at $18.69.
Most of the rally in GoPro stock was likely predicated on news about the company’s upcoming drone camera.
The drone, called Karma, will be coming out sometime in the coming months, and could bring back some “street cred” to GPRO with the all-important younger male demographic.
Click to Enlarge Additionally, with GoPro stock down more than 70% in 2015, many investors may have realized the loss for tax reasons, which removes some of the selling pressure going into 2016.
Since making an all-time low of $15.90 on Dec. 14, GoPro stock has been forming a solid base, grinding higher by nearly 17%.
A move past the $19.65 resistance level should lead to GoPro stock entering back into the higher trading range between $20.70 and $26.
Click to Enlarge Yesterday saw some notable put selling in GPRO stock, with 3,505 of the GPRO Jan $18 puts, 2,741 of the GPRO Jan 5 $18.50 puts and 5,096 of the GPRO Jan 5 $19 puts trading, with 40% of the trades taking place on the bid. This type of put selling usually indicates a big player pre-positioning to be a buyer of the stock.
GPRO Stock Trade
GoPro stock is trading at only a 16.6 forward price-to-earnings ratio, and with earnings expectations of just 18 cents due on Feb. 4, the bar to beat analyst estimates is certainly not set too high. With implied volatility still at elevated levels, I think selling some out-of-the-money put spreads to tag along with the big players’ put sales makes intuitive sense.
Click to Enlarge Specifically, I would look to sell the GPRO Jan $18 puts and buy the GPRO Jan $16 puts for a 34-cent net credit. The short $18 strike price positions 3.83% below the $18.69 closing price of GPRO stock.
These are the regular monthly options that expire on Jan. 15, well before the Feb. 4 earnings date.
The maximum gain on the trade is $34 per spread, while the maximum loss is $166 per spread, with a return on risk of 20.5%.
I would look to close out the trade on a meaningful move below $18 on GoPro stock, while letting the spread expire and keep the initial $34 net credit if GPRO remains well behaved.
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.
