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GoPro Inc (GPRO) Option Bull Gets Crafty

How one GoPro Inc trader employed puts to help fund a bullish position

by 9/17/2014 1:12:43 PM
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After a two-day pullback from record highs, GoPro Inc (NASDAQ:GPRO) is back in the black again today, up 2.8% at $67.04. The stock has more than doubled since going public in late June, and its 14-day Relative Strength Index (RSI) sits in overbought territory at 71, suggesting the recent breather may have been in the cards. Against this backdrop, one crafty options trader implemented a relatively low-cost bullish play to gamble on even higher highs for GPRO.

Daily Chart of GPRO since June 2014

Intraday call volume is running at nearly twice the typical pace today, with more than 35,000 contracts exchanged. For comparison, just 13,000 GPRO puts have traded thus far. While short-term option bulls are apparently buying to open the October 55 call, where implied volatility has rocketed 23.9 percentage points, the aforementioned spread strategist is looking longer term.

Diving right in, it appears the speculator initiated a bull call spread at the January 2015 70- and 80-strike calls. Specifically, the trader bought to open 4,584 70-strike calls for $5.90 apiece, and sold to open an equal amount of 80-strike calls for $2.90 each. Then, the speculator sold to open half as many -- 2,292 -- January 2015 43-strike puts for $3 apiece, bringing her net debit to $1.50 ([$5.90 - $2.90] - [$3/2].

Had the trader simply initiated the bull call spread, her net debit -- and maximum risk -- would amount to $3 per pair of contracts. Her breakeven on the trade would be $73 (bought strike plus net debit), representing expected upside of 8.9% from GPRO's current perch, and more than 1.5 points north of the stock's current all-time high of $71.42. Profit potential would max out at $7 per spread (difference between strikes minus net debit), should GPRO topple $80.

By selling to open half as many deep out-of-the-money 43-strike puts, the speculator halved her net debit to $1.50; this represents her maximum risk on the trade, as long as GoPro Inc (NASDAQ:GPRO) stays north of $43 through the options' lifetime. Plus, her breakeven now stands at $71.50 (bought call strike plus net debit), and her maximum potential reward at $8.50 per spread, should the stock conquer $80. However, by writing the puts to open, the seller's downside risk will accumulate if GPRO breaches $43 within the options' lifetime, as the puts will move into the money.


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