Dumpster divers are taking note of GoPro (NASDAQ: GPRO ) stock. The attraction is due in large part to last week's epic earnings reaction. The better-than-expected results for GPRO stock delivered a rousing one-day 17.7% rip on monster volume. Suffice it to say the rally breathed new life into a stock that was stumbling into the event.
Since then, GoPro shares have suffered a two-day retreat due to profit-taking. Some give-back is undoubtedly justified after such a rapid rise, but the key will be whether bulls sally forth to defend their newfound turf. I'm willing to bet they do and I'll show you how to profit from it.
Friday's moonshot sent GPRO back above its 20-day, 50-day, and 200-day moving averages. Many horizontal resistance levels also melted in the face of its fiery flight. That leads me to believe that this breakout has staying power. I'd rather wager that dips are a buy than guess that the move was a one-off that will quickly be reversed.
Click to Enlarge Source: OptionsAnalytix
The lower price tag of GPRO stock makes it a mighty good looking candidate for selling puts. Since the margin requirement for this strategy is around 15% of the stock price, it's a dirt cheap play. Furthermore, the high volatility of its stock options makes the potential reward high. This is a killer combo that offers a mouth-watering return on investment if GPRO stock cooperates.
How to Cash Flow GPRO Stock
If GoPro shows signs of reversing higher after this two-day pullback, then sell the September $6 put for 25 cents. Consider it a play that profits if the stock sits above $6 at expiration. The max reward is limited to the initial 25 cent premium.
By shorting the put, you are obligated to buy 100 shares per contract at an effective purchase price of $5.75. To minimize the loss if the stock sours I suggest exiting on a break of the $5.50 support level.
As of this writing, Tyler Craig didn't hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.