Heading into the final hour of Monday’s session and one marking a fourth straight day of listless, non-directional trade in the likes of the SP-500, one name seeing some heat-seeking, well-bid option action or what we might liken to a discounting of a large expected move, is Groupon (GRPN).
The recent IPO and of late “investors pulling out” play is up in front of the report, but by a rather unimportant fractional 2%. Technically, with shares of GRPN off nearly 80% from its November highs near 31, today’s action is the latest to see a weekly trio of candlesticks attempting to suggest “this time we mean it!” from bloodied bulls trying to ride shares off its latest all-time-lows of 6.33.
On the option side, traders are preparing for tonight’s corporate confessional with a heavy, but fairly even mix of activity with Groupon’s Put/Call ratio currently showing modest favor for its calls with a reading of 0.86. Implieds are hitting record levels with the earnings pure-play August contract reflecting implieds of about 300% for its at-the-monies. That type pricing tells us traders are pricing in a 68% or 1SD chance shares will remain within a very wide 27% of its current share price of 7.72.
Most active in the calls is the near-the-money August 8 call on 9,500, while the fairly well-out-of-the-money August 6 put with its stiff but fractional price tag of $0.28 per contract has seen the most activity on the board Monday on volume of more than 11,300.
With shares at 7.72, the nearer-to-the-action call is fetching $0.83 and needs a 14% move higher just to breakeven. While there will be four trading days remaining, near 300% IV as well as theta of $0.12 and building dictate bulls using the contract as a standalone delta position will need shares to fully cooperate in order to see profitable results.
Figure 1: Groupon Implied Volatility
Given the stiff pricing circumstances, extrinsic or time premium following the report will be negligible at the expiration breakeven of 8.83. Thus, a bull long the call would require the full help of intrinsic value to compensate for the forfeiture in time value. And while at strike traders could assume greater extrinsic premium available; that gain comes at the undesirable expense of the entire contract being worth less as intrinsic value shrinks to zero and the larger, but well-reduced time value component.
Using Platinum’s option calculator we can estimate what $8 would look like, as well as any other price level for GRPN while pricing implieds based on an anticipated volatility crush. Our own forecast of implieds on Tuesday anticipates the August at-the-money’s likely to trade in a range of 110% - 150%. That may sound like a loose forecast, but since we’re dealing with a single digit stock and August so close to expiration; we’re really talking about a net dollar price of $0.32 to $0.43. And to us that makes enough sense and cents to consider, even if it doesn’t quite add up for bulls.
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.
