MorningWord 12/23/14: All’s Well That Ends Well?

by Dan December 23, 2014 9:33 am • Commentary

With the Fed’s continued dovishness last week, and this morning’s Q3 GDP revised higher its hard to see what will derail U.S. stocks between now and year end.  Holiday trading periods like the one we are in this week and will be in next have a way of lulling those involved into a bit of a slumber, often causing a certain amnesia of prior market ills. The higher we go in December, the sharper the correction will be at some point in Q1, as the likelihood that the perceived ills of the commodity crash, weak emerging markets and the potential for Russian contagion have gone away as a result of our data is not particularly great.  Just Saying.

As for what’s left this week??  Well, there is GoPro’s ipo lockup expiration tonight, of 108 million shares* that will be free’d up to trade by insiders and early investors.  Many of you may be wondering if you are having a little deja vu as there have been other instances of late where the company or insiders have disposed of shares despite being bound by the lockup agreement.  On two instances, one back in September and then again in November, the company broke the lockup to in the first case have shares gifted from the founder to his foundation, and in the second instance, just because.  Since the November 19th 12 million share secondary at $75, the stock has declined 22%, and now tests investors mettle in front of their desire to book gains, or wait another week or so and register them in 2015.

Last night on CNBC’s Fast Money I took a quick look at the set up into the event, and the options market is implying about an 8% move in either direction by Friday’s close.  *But I need to make a correction from last night’s hit, I stated that 108 million shares were coming unlocked, but this was amended when the company did their 12 million share secondary in November, per WSJ:

Initially, many more shares were eligible for sale on Tuesday, but GoPro pushed back the lock up period for many shareholders until mid-February by assembling an $800 million secondary offering in November. Under the terms of the November share sale, the investors that unloaded stock then had to agree to a new lockup that would restrict them from selling their shares for another 90 days.

So the bulk of the lockup expiration will now be 90 days from the November 19th secondary, in mid February.

Feb. 17, 2015 will now be the day that analysts and investors will watch much more closely, as the lock up on 76.1 million shares of GoPro will expire then.

Watch here:

Many of you ask just how we figure that implied move, so I thought I’d break it down again.  GPRO shares closed at $58 last night.  The Dec 26th weekly 58 straddle (the 58 call and put combined) was offered at a bout $4.50 (2.10 for the call and 2.40 for the put), if you bought that, then you would essentially playing for movement between now and expiration, or about 2 1/2 trading days.  To make money you would need a move above $62.50, or below $53.50 by Friday’s close, or about an 8% move in either direction, thus the implied move of 8%.  Options traders will routinely try to determine whether implied event moves are cheap, expensive or fair, and in most cases will look at historical movement to arrive at this assessment.  Which makes it tough in this case as there is little to go by given GPRO’s short trading history.

That being said I don’t think it is much of a coincidence that the stock topped out in September as the company surprised investors allowing for a break of the lockup agreement and then again in November.  The surge in GPRO shares in September had a sort of unusual supply/demand element to it, given the very small float and high short interest, shares were amazingly expensive to short causing routine buy ins which set off an epic short squeeze, until more shares entered the float.  The stock is clearly a bit near term oversold, and the increased float should ease a bit of the supply/demand issues, helping to low the borrow, and ultimately cause options prices to temper a bit (3o day at the money implied vol is 70%):

GPRO 30 day at the money IV from Bloomberg
GPRO 30 day at the money IV from Bloomberg

So a supply/demand set up that will have increasing supply, and not sure how much demand post the holiday season sales data is known.  Any way you look at it though, options will be a far more attractive way to take directional views in GPRO going forward.