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Options Lab: GoPro Inc (GPRO)

Breaking down a hypothetical trade on GPRO

by 8/28/2014 11:57:03 AM
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GoPro Inc (NASDAQ:GPRO) has been a beast on the charts since its public debut in late June. Specifically, at $48.10, shares of the camera maker have tacked on about 68% in just over two months. What's more, the stock has been in a steady uptrend since consolidating atop the $38 level in early August. That said, how might one use options to capitalize on GPRO's price action? We're about to show you how, by walking you through a hypothetical short put strategy.

Daily Chart of GoPro (GPRO) since June 2014

This neutral-to-bearish strategy -- which consists of selling a put to open -- is used to set a bottom for the underlying. For example, suppose an imaginary trader named Sue was confident that $38 would hold up as technical support for GPRO over the next couple of months. She could act on that conviction by selling to open a 38-strike put.

Let's get more specific. Sue decides to write to open 10 October 38 puts at a bid price of $0.85 apiece. In so doing, she collects an initial premium of $0.85 per contract, or $850 total (premium received * number of contracts * 100 shares per contract), less any brokerage fees. This represents Sue's maximum potential gain on the play, should GPRO remain above the strike through the close on Friday, Oct. 17 -- when the back-month options expire. Notably, delta on this put is currently negative 0.14, denoting a less than 1-in-7 chance the option will be in the money at expiration.

While the trader's chances of profiting are high, she's also taken on considerable risk compared to simply buying a 38-strike call. Should GoPro shares descend below the strike during the put's lifetime, Sue risks assignment -- in which case, she'd have to buy the stock at a premium to its current price -- and potential losses on a move down to zero in the underlying. Digging deeper, losses will begin to accumulate if the equity breaches the breakeven point of $37.15 (strike less premium collected).

That said, let's walk through a couple of at-expiration scenarios. If GPRO is sitting at $37.95 at the close on Friday, Oct. 17, the contract will finish in the money. Nevertheless, Sue will still net a profit of $0.80 (current price less breakeven price), or $800 total, less any brokerage fees. However, if GoPro Inc (NASDAQ:GPRO) ends at $36, she will swallow a loss of $1.15 (current price less breakeven price), or $1,150 total, plus any brokerage fees.


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