Groupon (GRPN), a recent IPO and more recently spied “investors pulling out” internet-based group coupon play reports after the close tonight; but investors have decided to embark upon a rare shopping binge in front of the report. Intraday, share of GRPN are up more than 20% near session highs following Friday’s latest, less-than-fresh low of 9.63 for the stock.
News driving today’s enthusiastic bid is absent, but given short interest of roughly 8.5%, a days-to-cover ratio of 5.80 and a steady downtrend since last reporting in early February and coming forward with an accounting faux pas; bears can’t be denied some well-deserved profit-taking. At the same time, one can’t deny bulls right to look past squirrely past results and release clean, stronger-than-forecast results for its first quarter and which analysts currently peg at profits of $0.02 per share on revenues of $530M.
On the option side, trading is very heavy at more than 45,000 contracts but split fairly even with a put / call ratio of 0.87. Most active on the session and by a narrow margin, both the June 9 and 7 strike puts have traded about 6,000 contracts.
Near-term implieds for the May and June contracts and where more than 90% of today’s activity is concentrated is soaring to all-time-highs as net demand for protective strategies appears to be driving the order flow versus open-ended positions designed with net short contracts on one side of the price chart. However, earlier in the session one larger trader does look to have initiated just that sort of position with a put frontspread.
Figure 1: GRPN June 9 / 7 Frontspread: 500 x -1000x
With shares near 11, roughly 500 x -1000 June 9 / 7 put frontspreads for a debit of $0.33 were put up. This position, which is the other side of the backspread, can realize a maximum profit of $1.67 at the sold 7 strike if shares finish at that level at June expiration. If GRPN, were to proceed further south, those gains would be taken back one-for-one as the stock declined while maintaining potential catastrophe risk of $5.33 on roughly 500 contracts or 50,000 shares down to zero.
In May where positioning faces expiration in four sessions, average at-the-money implieds of 235% statistically suggest a 68% or 1SD chance shares of GRPN will remain within roughly 25% of current levels near 12 into Friday’s close based on bell curve analysis. That’s steeper than the actual straddle cost of $2.35 and break-evens of roughly 20%, but is a common discrepancy due to the theoretical concept of continuous hedging as shares move away from the strike and adjustments are made.
For traders that have heard the option trading idiom, “Sell 100 and Buy 200”, it’s obvious an ultra-volatile move is being prepared for. There are no guarantees today’s shoppers of long premium will be rewarded, but the expression's basis is centered on pros willing to fade panicked IV action up to a certain threshold, but willing to cover if conditions get truly over-the-top.
Other important food for thought to consider with regards to Groupon’s options is the skewed IV bid in Groupon’s puts. Levels of about 210% in the May ATM call versus 265 in the adjacent put and roughly 95% and 160% in the June ATMs suggests short stock positioning is at risk of being called in. This pricing can be easily eye-balled as odd-looking by setting up conversion and reversal markets which would otherwise represent serious market inefficiency and money making opportunities for traders establishing an equal ratio position of short stock combined with long calls and short puts of the same strike.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
