A little less than two weeks ago we detailed a near term bearish trade in GoPro (GPRO) after the stock’s rally on new product announcements (read below). To refresh, here was the trade from June 9th:
Trade: GPRO ($59) Buy to Open June regular 59/55/51 Put Fly for 1.00
-Buy 1 June 59 Put for 1.90
-Sell 2 June 55 Puts at .50 each or 1.00 total
-Buy 1 June 51 Put for .10
With about a day and a half to June expiration, and the stock just below our long put strike, the trade becomes fairly binary, meaning if the stock is above 59 tomorrow, then the probability of at least a small loss, and the potential for a full loss increase every minute.
Now with the trade break-even I am going to close as the risk reward of holding the position until tomorrow quickly becomes worse than a coin flip.
Action: GPRO ($58.22) Sell to Close June regular 59/55 1×2 put spread at $1*
-Sell to close 1 June 59 put at$1.05
-Buy to close 2 June 55 Puts for .025 each or .05 total
*we are not going to sell the June 51 puts as they are. Also while it is very unlikely that the June 55 puts will be in play tomorrow, you never know with a stock like this, so we think it makes sense to close them for a couple cents each.
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Original Post June 9th, 2015: New Trade – $GPRO: Quad-Copters, Really??
Last week I discussed GoPro’s (GPRO) announcement that they are entering the drone and virtual reality markets (below). The stock clearly liked the news and his risen about 6% since the start of the month, a period in which the S&P 500 (SPX) and the Nasdaq Composite have declined a little more than 1%. The stock clearly has a cult following. Couple that with high short interest (about 23%) and you have a stock prone to extreme volatility.
I concluded my fairly skeptical commentary with the following:
I would not short this stock until there is a meaningful slow down in revenue growth. Trading at a little less than 4x sales, and 3.3x next year, and 33x this year’s expected earnings, and 28x next, the stock is not ridiculously expensive if you believe they only need to get the camera thing right while they only need to derive a little value from their accessories or content platform.
So the hating here is more on the sentiment around the products and what the move represents to the broader tech mania we seem to be in. The stock’s 60% peak to trough decline from October to March erased a bit of the exuberance, while the 22% short interest and continued skepticism should keep the stock squeezy.
And in a market like the one (now with M&A fever!) wouldn’t it be fitting to see a $10 billion deal for one of the poster-children of whatever the current tech mania exists?
All that said, in the near term the stock could be poised for a pullback towards the $50 level as we near the 1 year anniversary of their June 25th 2014 IPO which will see more shares come off lock up expiration.
From purely a technical standpoint the stock has risen 60% from the 2015 lows, and has stalled out at a breakdown level from Jan at $60, with an obvious pull back level to $50 possible. That also corresponds with the stock’s 50 day moving average (purple line circled in green):
Short dated options prices are very near their all time implied volatility lows, with 30 day at them money implied volatility at about 45% (blue line below). That is actually below 30 day at the money realized vol (white below, how much the stock has been moving) signalling that options traders are fairly complacent in the near term:
In the near term I want to make a defined risk bearish play aiming for a pullback to the mid $50s between now and next Friday:
Trade: GPRO ($59) Buy to Open June regular 59/55/51 Put Fly for 1.00
-Buy 1 June 59 Put for 1.90
-Sell 2 June 55 Puts at .50 each or 1.00 total
-Buy 1 June 51 Put for .10
Break-Even on June 19th Expiration:
Profits: between 58 and 52 make up to 3 with max gain of 3 at 55
Losses: up to 1 between 58 and 59 & between 51 and 52 with max loss of 1 above 59 and below 51
Rationale: Despite relatively low levels of implied vol I am using a strategy that we usually employ to offset high options prices. In this case I am using the structure to reduce my premium outlay and define a wide range of profitability very near the money.
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Original Post June 1st, 2015: MorningWord 06/01/15: GoPro Yourself
Last Thursday on CNBC’s Fast Money the panel discussed GoPro’s (GPRO) move into new hardware markets, with a “guad-copter” drone and a six camera spherical array used to capture content for virtual reality. Both were announced by GPRO CEO Nick Woodman at the Code Conference, watch here:
My immediate response was that these announcements are absolute nonsense from an investor standpoint, and for those with any memory of the late 1990s tech stock bubble, the stock’s 6% gain Thursday was reminiscent. All the power to Woodman and GPRO as they should be looking for ways to leverage their core products, and these two accessories should be interesting to a small subset of their users. But for investors to bid the shares up on the opportunity these two products present is just downright silly. At the same conference, famed tech analyst Mary Meeker (formally of Morgan Stanley, and now Venture Capitalist at Kleiner Perkins) presented her annual Internet Trends and stated that commercial drone shipments are to grow 170% year over year in 2015:
Okay… Drone adoption, both consumer and commercial, is sure to be hampered by tons of regulation, and will be far from a layup. The first fatality from an out of control commercial drone (and that is coming to a theater near you) will initiate a breathless media panic like we haven’t seen since the Summer of the Shark (or Ebola in the U.S.) and a public debate on their risk / reward.
And a spherical array that loads six GPRO cameras, pahleez. Those trying to make a bull case for GPRO based on these products make little sense. And at some point in the near future we will look back and ask ourselves how did we miss the oddity of the rationales given for some of these stock moves in 2015.
All that being said, I would not short this stock until there is a meaningful slow down in revenue growth. Trading at a little less than 4x sales, and 3.3x next year, and 33x this year’s expected earnings, and 28x next, the stock is not ridiculously expensive iff you believe they only need to get the camera thing right while they only need to derive a little value from their accessories or content platform.
So the hating here is more on the sentiment around the products and what the move represents to the broader tech mania we seem to be in. The stock’s 60% peak to trough decline from October to March erased a bit of the exuberance, while the 22% short interest and continued skepticism should keep the stock squeezy.
And in a market like the one (now with M&A fever!) wouldn’t it be fitting to see a $10 billion deal for one of the poster-children of whatever the current tech mania exists?