This Camera Maker is Back Again
Camera maker GoPro was back in the news this week. This company has long fascinated investors. It created a market, consistently delivers high quality profits, and consistently fails to meet sales and earnings targets.
The market for video has been growing. GoPro recognized this and created cameras to provide a professional view of action sports. Its products are worn by extreme athletes around the world and have even captured the world’s longest parachute drop, recording the action from the edge of space.
The company recently announced two new products. The latest edition of GoPro’s original line of cameras comes with a powerful sensor that can capture 4K video at 60 frames per second, or in HD at 240 frames per second.
According to reviews, this means the camera can record “ridiculously smooth slow-motion footage that would have required a large professional camera—not a small rectangle that fits in the palm of your hand—up until very recently.”
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The company is also releasing a 360 degree camera for consumers. The Fusion device has two cameras (one on the front and the back) that can capture 5.2K HD video at up to 30 frames per second. It can capture 18-megapixel 360-degree spherical photos, and record 360-degree audio.
These products might break the stock out of its extended slump.
A Safer Trade Than GPRO
Despite its great products, GoPro has not been a great investment. This has led to low volatility in the stock. But, one of its suppliers has been more volatile and even though it hasn’t been a great investment, it has been a great trade for traders looking to benefit from volatility.
Ambarella (NASDAQ: AMBA) develops chips used in video processing equipment. Its system-on-a-chip designs incorporate high-definition (HD) video processing, image processing, audio processing and other system functions on a single chip.
Its technology is used in wearable cameras, automotive cameras that help drivers back up or park, security cameras and unmanned aerial vehicles. The stock has seen its fortune rise and fall along with GoPro’s, but the increased volatility is useful.
To recover to its highs, AMBA has taken a number of steps to extend its reach past the sports camera market. The company has partnered with Taser (NASDAQ: TASR) to provide cameras for law enforcement personnel.
Security cameras, drones, products for the home and driverless vehicles are all potential customers for AMBA’s technology.
One analyst noted that Ambarella has a number of potential products in its pipeline associated with video processing and delivery. The company’s engineers have been working on these problems for over 15 years.
The engineering team has reported a number of successes. Ambarella was the first company to deliver video through an ultra-high definition system on a chip, a technology that has now become an industry standard, widely used video compression platform.
The company continues to emphasize research and development. Management dedicates more than $100 million a year, about a third of all revenue, to its search for new products and development of enhancements to existing products.
Research is being done in a variety of areas. The company is developing face recognition technology which could be used in security systems, information technology platforms and smartphones. The company is also focusing efforts on driverless car technology.
Ambarella is working with Garmin on dashboard cameras that have the ability to record a 180 degree view in front of an automobile and also scan for collision risks at the same time. The technology would also be applicable to back up cameras which will soon be required in all new cars.
These products make Ambarella a potential long term winner in the technology sector. But, these products could take years to come to market. The company also faces brisk competition and could be leapfrogged by a competitor before the products are even ready for market.
For that reason, investors should consider AMBA to be a high risk stock. However, the risk increases volatility and the stock is likely to provide a number of trading opportunities for those willing to focus on the short term.
A Short Term Strategy For AMBA
Until one of its products breaks out or the company announces an important advance in technology, the stock is likely to fall into a relatively narrow trading range. One option strategy that benefits from a stock in a trading range is an iron condor. This strategy has the added benefit of carrying limited risk.
To open an iron condor trade, the investor sells one call while buying another call with a higher exercise price and sells one put while buying another put with a lower exercise price. Typically, the exercise prices of the calls are above the market price of the stock and the exercise prices of the put options are below the current price of the underlying stock.
In an iron condor, the difference between the exercise prices of the two call options will be equal to the difference between the exercise prices of the two put options. The final requirement for this strategy is that all of the options must have the same expiration date.
The risks and potential rewards of the strategy are shown in the following diagram.
Source: The Options Industry Council
The maximum gain on this trade is equal to the premiums received when the position is open. The maximum risk is equal to the difference in the two exercise prices less the amount of the premium received when the trade was opened.
Opening an Iron Condor in Ambarella
For AMBA, the trade can be opened using the following four options contracts:
As you see, all of the options expire on the same day. These are weekly options that expire on Friday, November 3.
The difference in the exercise prices of the calls or puts is equal to $2.50. Since each contract covers 100 shares of stock, this means the maximum risk on the trade is equal to $250 less the premium received when the trade was opened.
Selling the options will generate $1.20 in income ($0.90 from the call and $0.30 from the put). Buying the options will cost $0.60 ($0.50 for the call and $0.10 for the put). This means opening the trade will result in a credit of $0.60, or $60 for each contract since each contract covers 100 shares.
The maximum risk on the trade is equal to the difference in strike prices ($2.50) minus the premium received ($0.60). This is equal to $1.90, or $190 since each contract covers 100 shares. Most brokers will require a margin deposit equal to the amount of risk. That means this trade may require just $190 in capital.
The potential reward on the trade ($60) is 31% of the amount risked, a high potential return on investment. The trade will be open for about a month. If a trade like this is entered every month, a small trader could quickly increase the amount of capital in their trading account.
The iron condor is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that should be lower than owning the stock.
These are the types of strategies that are explained and used TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.