Go-Pro (GPRO) Options Activity Case Study

Go-Pro (GPRO) shares are down around 20% after hours following one of the ugliest earnings reports of the season, and this is a great example of teaching how to distinguish options activity worth following.

On CNBC’s Fast Money on Thursday, one of the Najarian brothers highlighted “unusual” call buying in Go-Pro (GPRO) and recommended it, of all the action that morning, for some reason chose GPRO.  I don’t mean to rail on the Najarian’s, I realize they are entertainers, and probably are really cool guys to grab a beer with, but I think their practices are irresponsible.  First, they are often mentioning positions they are getting into to a large viewing audience, which immediately leads to a reaction in the stock price, but rarely do they ever let that same audience know when they are exiting a position.  Second, I could see if they were making quality recommendations, but it seems like everything they choose completely blows up, Community Health (CYH), Tenet Health (THC), Weatherford (WFT), Hain Celestial (HAIN), Weight Watchers (WTW), Go-Pro (GPRO), and that’s just recently.  Third, these quick pump jobs on TV allow their paying subscribers to capture quick moves while the public viewers are left holding the bag, as they are late to the party, so customers are basically paying to get “inside info” on what the daily pump job will be.

Now, to focus on how to professionally read options activity and use Go-Pro (GPRO) as an example of what not to do.  If you think I am Monday Morning Quarterbacking this example, I called this out live on Twitter yesterday that this would be yet another awful call.

Let’s go step by step:

For background info, they highlighted the Nov. 4th (W) $13 calls which traded around 5,000 contracts in the morning at $0.65 to $0.70, so roughly $350,000.

Things that should be considered each time analyzing options activity:

  • Timeframe: These were options expiring in two days with GPRO set to report earnings on 11/3. Always be wary of options activity in the 1-3 day window right ahead of earnings, especially in weekly and front month.  The clear rationale here is that a lot of this activity is hedging, because traders want to protect against near-term event risk, and the cheapest, most efficient method is via near-term options, not having to pay the excess premium.  Options action that has been sitting in open interest for weeks/months has a lot more meaning for determining directional bets.


  • Trade Size: A $350,000 trade does not carry a lot of weight, especially in a name that trades 20,000 calls and 13,750 puts per day on average. This type of short-term, low Delta trade does not give any confidence to this being a smart institution making a big directional bet.


  • Short Float: This was one of the major red flags in GPRO that made recommending calls/call spreads irresponsible.  GPRO has 35.7% of its float short, over 30.5M shares, and short interest has climbed 21% since last quarter.  A $350,000 weekly call purchase is a drop in the bucket against 30.5M shares short, effectively these weekly calls had a net Delta equivalent to 150,000 shares.  Clearly this position made sense as an obvious hedge against a short stock position.


  • Other Notable Open Interest: Once again, it is irresponsible to just look at one day’s activity in a vacuum. In the case of GPRO, all of the notable options activity the past 6 weeks has been bearish, including 16,500 November $12 puts bought to open for $760,000 on 10/19.  You can’t ignore the much larger meaningful positions in open interest.  The results from my options database are below:


  • Earnings History: If deciding to gamble on earnings, at least you want history on your side, so take a look at past reactions for a gauge of how well the company tends to report. GPRO shares had closed lower 4 of the 5 reports into Thursday with an average max move of 12.44%.


  • Price-Action and YTD Performance: GPRO shares were down 33.7% YTD into the report, and a stock that traded above $88 just over a year ago with trading at $12.80, not exactly a sign of a stock institutions are accumulating.


  • Fundamentals: Into this quarter, GPRO was forecasting revenues down 20% Y/Y and FY16 revenues down 14.3% Y/Y. GPRO is not expected to be profitable until 2018, EPS coming down from $0.90/Share in 2014 to an expected loss of $1.07/share in FY16.  Gross Margins of 45% in 2014 dropped to 41.55% in 2015 and forecasted at below 40% for 2016.  There are almost too many red flags to mention when looking at the fundamentals, but all point to a name that is a very risky investment.  Shares traded down to $9 after hours, and the Company does have $2/share cash on the books with no debt, so shorts may look to start covering the name, though the forward guidance shows major issues remain and this is your typical fad stock.


Hopefully some of the things covered here will prevent you in the future from getting burnt by following along with these sucker bets.