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Groupon Speculators Target Post-Earnings Strength

GRPN is sitting squarely in oversold territory

by 11/5/2012 12:40 PM
Stocks quoted in this article:

Groupon Inc (NASDAQ:GRPN -- 3.87) is seeing heavy option activity on both sides of the aisle today. Roughly 55,000 put contracts have crossed the tape, representing more than 10 times the average intraday volume for put options. On the flip side, around 14,000 call contracts have crossed the tape, approximately twice the typical pace.

The majority of today's put volume comes from one block of 46,900 November 4-strike puts crossing the tape for 45 cents around 9:45 a.m. ET. These contracts were traded in between the ask price and the bid price, making it hard to tell if they're being bought or sold, respectively. However, Trade-Alert indicated this may be related to a position initiated on Oct. 23, when 40,000 November 4-strike puts were sold for 20 cents.

Meanwhile, the November 3.50-strike call has taken second billing as the day's most-active strike. Of the approximately 6,650 contracts that have changed hands, 81% have done so at the ask price, volume is outstripping open interest, and implied volatility has ticked nearly 44 percentage points higher. In other words, it's safe to assume that a portion of today's volume represents buy-to-open activity. By initiating these long calls, speculators will profit with each step north of $4.22 (the strike plus the volume-weighted average price of $0.72) GRPN takes through Friday, Nov. 16. This represents a 9% premium to the stock's current perch.

With GRPN scheduled to take its turn in the earnings confessional after the market closes on Thursday, these traders are paying a pretty penny for their bullish bets. Specifically, implied volatility at the November 3.50-strike call is more than double the 20-day historical (realized) volatility (131% vs. 60.4%), indicating option premiums are relatively expensive at current levels.

From a broader sentiment perspective, option players have displayed a growing preference for bullish bets over bearish in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio has risen to 13.01, from its 50-day call/put volume ratio of 4.22. What's more, the shorter-term ratio ranks higher than all other such readings taken during the past year, indicating calls have been bought to open over puts at an annual-high clip during the last two weeks.

It's a well-known fact that GRPN has struggled on the charts, which makes this trend toward calls a little surprising. In addition to underperforming the broader S&P 500 Index (SPX) by roughly 45 percentage points over the past 60 sessions, the stock has shed more than 80% of its value in 2012. This poor price action has been highlighted by GRPN's 60-day moving average, which has ushered the equity lower since mid-February.

With GRPN's mixed history in the earnings confessional (the company has bested bottom-line expectations in two of the past three quarters), this uptick in call volume may simply represent short sellers picking up hedges against their pessimistic positions. Short interest currently accounts for a lofty 12.8% of the stock's available float. Additionally, the equity's relative strength index (RSI) of 28 suggests GRPN is currently sitting in oversold territory, implying a near-term bounce could be in the cards.

For GRPN's third quarter, Wall Street is calling for a profit of 4 cents per share.


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