GoPro's current tagline is "Be a Hero." In fact, that's just the kind of adventurous mindset one might need in order to short shares of the wearable camera maker that recently went public.
GoPro priced its IPO at $24, and since then, shares have risen as high as $49.90. On Wednesday, the stock took a break, sliding more than 12 percent, as skeptics scrambled to get short. But a new possibility for those who want to bet against the stock will likely come on Monday, when the Chicago Board Options Exchange (more commonly known as CBOE) has said they are planning to list options on GoPro.
Even for those who are confident the stock is overvalued, shorting does have its perils.
First, and most obviously, there is no telling how high the stock can go. As John Maynard Keynes is frequently (if likely apocryphally) quoted as saying, "Markets can remain irrational longer than you can remain solvent."
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But GoPro is a special case. Massive demand by investors to borrow shares to short (as one must borrow the shares in order to short a stock) has dramatically increased the cost of betting against the stock.
"As of today, seemingly every available piece of stock is being hovered by reporters to support short positions," Timothy Smith, executive vice president at data provider Astec Analytics (which is part of SunGard), told CNBC.com on Wednesday. "So far today an additional 1.6 million shares have gone out the door. The rates being paid are also very high, being around 80 percent on an annualized basis."
In comparison, the rate one needed to pay in order to short a recently public market only got as high as 2.5 percent, and the rate for Twitter only briefly got as high as 40 percent.
Smith did add that as institutions offer additional supplies of the shares to borrow, rates will fall.
Currently, short interest in the stock is between 6 and 7 percent, according to the OTAS Technologies head of product specialists Simon Maughan.
Another avenue for those who think GoPro is badly overpriced will open on Monday, when the CBOE has announced that it plans to list GoPro options, provided the stock meets listing criteria. Traders could then perform such maneuvers as buying puts. A put grants its owner the right to sell a stock for a certain price at a later date, and thus allows one to profit from a decline in the share price. But unlike a short position, the risk of the trade is limited to the amount paid for the put option, no matter how high the stock rises.
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Still, early options players could run into a whole different (if related) set of issues.
"You don't want to be the first one in there trading the options," said Dan Nathan of RiskReversal.com. "Since the stock is hard to borrow, it could make hedging for market makers difficult. The bid/ask spread is going to be very wide, and liquidity is going to be very poor."
"With options, you already have to get the direction, the correct magnitude of the move, and the timing correct," Nathan said. "When you add in those other factors—low liquidity, high implied volatility, and high bid-ask spreads, which means the cost of getting in and out is greater—it just compounds the issue."
—By CNBC's Alex Rosenberg
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