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Breaking down a call spread on GoPro Inc (GPRO)
Portable camera maker GoPro Inc (NASDAQ:GPRO) is flying in the face of broad-market headwinds, up 2.8% at $51.86. What's more, it looks like one options trader is cautiously optimistic on the equity's short-term prospects, implementing a two-pronged options play.
Specifically, it appears the speculator bought to open 2,000 weekly 2/13 52.50-strike calls for $2.90 apiece, and then helped fund the position -- and lower her maximum risk -- by simultaneously selling to open an equal amount of weekly 2/13 60-strike calls at $0.90 apiece. By constructing the bull call spread for $2 per pair of contracts, the trader will profit if GPRO muscles north of $54.50 (bought strike plus net debit) by the close on Friday, Feb. 13 (when the series expires), but her reward is limited to $5.50 (difference between strikes, less net debit) per pair of contracts, no matter how high GPRO should soar north of $60.
Had the trader simply bought to open the 52.50-strike calls, her potential reward would be theoretically unlimited. However, at-expiration breakeven on the trade would be higher, at $55.40 (strike plus premium paid), and she'd lose the entire $2.90 -- as opposed to $2 with the spread -- if GPRO remained south of the strike through the options' lifetime.
With GoPro Inc (NASDAQ:GPRO) set to report earnings after the close on Thursday, Feb. 5, the strategist could be gambling on a post-earnings pop for the shares, which enjoyed a single-session gain of 13% after the firm's late-October report. The sold calls were likely added to the mix in order to combat rising short-term option prices, as the stock's Schaeffer's Volatility Index (SVI) has risen to 83% -- in the 61st percentile of its range -- compared to an all-time low of 54% on Jan. 7.