GoPro Short Squeeze

[tjlocke99 18]

GoPro has been a wild stock.  Some commentators feel that it has been in a short squeeze.  I believe some of the DITM calls are upside down because of the difficulty borrowing the stock.

 

The OTM call spreads could be attractive, except that the bid/ask spreads are very wide.  I was wondering if:

1.  Anyone had any thoughts if there was any effective way for retail could trade GoPro

2.  I am wondering if there is any assignment risk in purchasing an OTM call spread.  For example with the stock around $90 now, let's say I can get the 95/105 Nov 3 Bull Call spread for around $2.25 (bid is .60 and ask 3.45 so this price would be well above the mid).

 

It seems if there is a short squeeze there could be a disaster with being long or short calls, especially if they are illiquid.

 

Here is one scenario.  I buy the spread in #2 above.  On 25 Oct the stock is at 110.  My DITM call is actually under trading at $13, and I actually lose money trying to close it.  I am also unable to close the short 105 due to lack of liquidity.

 

Alternatively, as its DITM and illiquid I want to exercise the call, but I don't have $9500k in cash in my account.

 

Just looking for some expert advice if this is a dangerous trade.  Forgot the potential loss of value on the spread if the stock doesn't move or goes down, just is there inherit option exercise risk.

 

Thanks!

[Kim 7,943]

Assignment is not necessarily a bad thing - if it doesn't cause margin call. Lets say you are assigned the short calls. So now you are short the stock and long the calls. Unless the short calls are not deep ITM, they will still have decent time value, so it would be actually great to be assigned. if this happens, just sell the long calls and cover the short shares.

[Yowster 9,180]

The stock will have to be well above $110 to get assigned on your options.  I've found that options will generally be assigned only when there is no more time premium built into the option price (its all intrinsic value), and it GPRO's case, its an extremely high IV stock so you'll have to be much more than $5 into the money for the option to be priced at just its intrinsic value.

 

Another type of trade for GPRO to consider that works well for high IV stocks in a general uptrend is to take advantage of the high IV and sell weekly calls against long options that still have a month or two before expiration (I've done this for GPRO and MBLY over the last month or so).  You can either buy OTM call calendars and continue to roll the weeklies until it gets close to your strike price.  Or buy longer dated ITM calls and sell weekly ATM (or slightly OTM) calls against them - in this case you would roll the weeklies if they could be bought back for less than what you sold them for, or roll the whole diagonal spread at a profit to higher strikes if the stock moves significantly higher than your short strike.  Both these methods will lose some money if the stock drops by more than the premium you are collecting in your short legs.

[tjlocke99 18]

Thanks Yowster.

 

I don't do the options based covered call using a diagonal with a long DITM call and a shorter term short call anymore.  That strategy seems to work best when the stock is flat to mildly trending up.  Otherwise you get burned on the gamma on a large move up and burned on the delta on a large move down.

 

Have you got fills anywhere need the mid on GPRO options?

 

Perhaps the verticle I original listed isn't a bad trade.

[tjlocke99 18]

Thanks Kim.  Well the issue is that yes it would cause a margin call for me.  I only have a $10k account.

 

Also the other issue I see is if DITM calls end up not being liquid.  I have had this problem numerous time with options, especially any that aren't heavily traded.  As the option gets DITM the bid/ask gets so wide that it eats up alot of the profitability.  Meanwhile the short option still has a tighter bid/ask.