- Short interest in GoPro stock has been building up over three months.
- The huge rally on 15 August backed by unusually high volumes likely indicates some short unwinding.
- That and call option trends indicate that GoPro might finally be seeing a reversal in market sentiment.
Shares of San Mateo, California-based action camera maker GoPro have staged a strong rally lately, most notably on 15 August, when the stock rallied over 9% amidst strong volumes. Short interest in the stock had been piling up since April, and it's likely that short covering also contributed to the steep one-day rally. What's more, the significantly higher open interest in call options compared to put options indicates a likely build up of bullish sentiment, which could limit the downside risk at the very least. GoPro, which has been seeing a gradual uptick in short interest for a while now, might finally be seeing a reversal in market sentiment.
Is GoPro Seeing Some Short Unwinding?
Short interest in GoPro stock has gradually inched higher since April 2016. Short interest in GoPro has surged from 22.5 million shares on 29 April to 30.79 million shares as on 29 July. As a percentage of float, short interest during the period has risen from 22.5% to 30.8%. Float excludes closely held stock and restricted stock to better represent the number of shares that are actually available for trading in the larger pool of total outstanding shares.
A build up in short interest generally represents the growing bearish sentiment about a stock. However, GoPro shares have shrugged off the bearish sentiment and rallied strongly over the last three months.
More recently, GoPro shares staged a strong rally on 15 August, gaining by a jaw-dropping 9%+ on the day amidst unusually strong volumes. GoPro volumes surged as 17.2 million shares changed hands, compared to the average daily volume of 7.3 million in the preceding month. It's likely that Monday's massive rally was fuelled in part by an unwinding of short positions in the stock, especially when viewed in the light of call options (option to buy the stock at a given price) data for August.
Call Options Show Bullish Sentiment For GoPro Stock
A look at the open interest for 26 August settlement shows a strong build up in bullish sentiment for GoPro stock. With open interest in call options significantly outpacing the open interest in put options (option to sell the stock at a given price), investors seem to be betting on the stock moving higher from its current levels.
A recent report by Schaeffer's research nicely sums up the growing momentum in GoPro call options.
"Whatever the catalyst, GPRO call options are flying off the shelves like hotcakes. GPRO calls are trading at four times the average intraday pace, and have more than tripled GPRO put options thus far. In fact, GPRO call volume is on pace to hit the 97th percentile of its annual range."
As highlighted in the Schaeffer's report, it's important to note that there's more than one way to interpret this trend. One, of course, could be that there's a real surge in bullish sentiment. On the other hand, this could also indicate that short sellers are buying call options to hedge their short positions, should the ongoing rally continue. Given the build up in short positions over the last few months, one can't rule out the latter. However, in either case, such a trend indicates the possibility of a further surge in the stock price, or limited downside at the very least.
What's good for investors who are eyeing a long position on GoPro is that the trend has been building up for a while. As per findings in the report:
"That's not to say today's appetite for GPRO calls is new, though. On the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 50-day call/put volume ratio of 2.08 is higher than 99% of all other readings from the past year. In other words, option buyers have been upping the bullish ante quite a bit during the past 10 weeks."
Further, GoPro's sustained rally over the last three months does reflect this sentiment. Short interest data as of August 15 is due to be released next week, on 24 August, and if short interest has indeed fallen, this could be a good time for speculative investors to enter the stock.
So Should You Buy GoPro Stock Now?
Short interest has been piling up for GoPro stock over the last three months. However, the stock has shrugged off the bearish sentiment, rallying strongly during that period. Further, the 9%+ rally on Aug 15 supported by unusually high volumes is likely to have been in part due to some short unwinding. Call option data for GoPro also indicates the build up of bullish sentiment, or limited downside at the very least. So should you buy into GoPro stock now?
As we'd discussed in a recent article on GoPro, the stock is still best suited for speculative investors. Conservative investors would do well to wait for GoPro's upcoming launches, the HERO5 camera and the Karma drone before jumping in. For those who understand the risks and are willing to speculate, if short interest has indeed fallen after the recent rally, this might be a good time to enter the stock.