I have been a longtime critic of GoPro Inc (NASDAQ:GPRO), especially when Wall Street was enamored with it. However, I have successfully traded GPRO stock from the long side, happy to take a speculative stance.
I have no disillusions that Wall Street will once again see value in the stock over the long-term. But I reserve my bets — and yes, they are bets! — to short-term trades against price action.
Wall Street seems to fall in and out of love with GPRO stock. Last May, shares rallied by nearly 100%. Unfortunately for the bulls, it consequently peaked in October and gave back everything (and more).
Today’s trade will be a rinse-and-repeat, knowing I have profits in my pockets from previous wins.
Fundamentally, GoPro is a camera company, so no one should have any disillusions of other potential (see: drones). At its top, investors talked about GoPro being the YouTube killer, but reality had other plans. After a series of flubs with regards to inventory control and market timing, GPRO now sits at a mere fraction of its all-time highs.
Technically, GoPro stock has had a few constructive candles after its ugly move on Friday, June 16. Now bulls and bears are likely to battle it out over a long-term pivot level. The $8.40 to $8.60 zone served as support, but then was lost on March 6 of this year. It has since served as a roof. But the bulls look like they want to give it another go.
Today’s trade is pure a gamble that the recent lows will hold for the rest of the year. This is not me endorsing the current valuation. In fact, if Snap Inc (NYSE:
SNAP) stock rebounds, it could siphon away potential bids since they are both “camera companies.” (Don’t take my word for it; just ask Snap’s management.)
Sure, SNAP fans can argue that there are differences between the two companies, but most investors don’t really care. If I am betting on GPRO, I don’t want to also bet on SNAP, and that’s why I believe they compete for bids in the stock market.
I don’t want to chase price targets and I don’t want to invest hoping for a buyout headline. Instead, I want to use GoPro options to generate income. To do this, I need to sell downside risk below levels that are likely to hold as support. Otherwise I will end up owning the shares and will have to manage that risk for minimal damage.
How to Trade GPRO Stock
The bet: Sell the Oct $7 put and collect 55 cents per contract. Statistically, this is close to a coin flip, but I already labeled this trade as speculative. If GoPro falls below my strike, we will own the stock and suffer losses below $6.45.
Selling options is risky, so only risk what you’re willing to lose. That said, we could mitigate the risk by using a bull put spread instead of selling naked puts.
The alternate bet: Sell the Oct $7/$6 credit put spread, where we have the same chances of success but with limited risk.
There isn’t too harsh of a compromise here, since the spread can yield 35% on risk. Compare this with buying GPRO shares and hoping for a 35% rally just to match the performance of the spread.
Actually, forget it. There’s no comparison.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
