GoPro Inc (NASDAQ:GPRO) reported earnings and Wall Street hated what they saw. Management beat consensus estimates, but guided lower. These days and with information getting priced in so fast, forward guidance is of utmost importance, so GoPro stock is down 12% on the open.
Today, I want to catch this falling machete. Don’t confuse this with me saying that I expect better things to come. So far, management has done a sub-par job at capturing our imagination past the initial shock of the camera itself.
GoPro Stock Is Still Full of Risk
I merely want to bet that GPRO will survive as a cool camera provider and GoPro stock will continue to muddle along this bottom for months. Any upside from that would help my trade, but I don’t need it to win.
Also, I am not dissing the product itself. I do like it; I’ve had two for years. But I have seen nothing new or compelling me to upgrade into their ecosystem. There was a time when traders floated the idea that GPRO would become the YouTube killer. I then went on record and marked the top in GoPro stock near $90. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) had nothing to worry about then.
Since then, GoPro stock had a few pops on speculation of new cash cows from drones and 360 cameras, etc. Nothing has wowed us like that first one. But there is always that chance. I won’t bet on that though … I’ll only be there to profit.
Fundamentally, it’s hard to bet on valuation since the company runs red. But with a price-to-book ratio of 3.5, I don’t think it would be a giant mistake to own GPRO stock at a discount from here.
Technically GoPro stock is still up on the year, but with this dip, it is now in danger from triggering a technical sell signal. If this level is lost, it could invite momentum sellers into a head and shoulders bearish pattern that could target $8.20. Though this is not a forecast, it is a scenario I need to consider.
Bottom Line on GPRO Stock
I count this as a speculative trade inside a conservative portfolio.
The Bet: Sell the GPRO April 2018 $7 naked put for 55 cents. This is a bullish trade, where I have a 75% theoretical chance for maximum gains. Otherwise, I will own GPRO stock and accrue losses below $6.45.
Selling naked puts carries big risk, especially for a stock as frothy as GoPro stock. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the GPRO April 2018 $7/$8 bull put spread, which has about the same odds of winning and would yield 20% on risk. Compare this with risking $9-per-share here and without any room for error, expect a rally profit.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
