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Groupon Traders Forecast Continued Struggles

Three-legged GRPN options strategy combines bear put spread and short call

by 10/16/2012 9:46 AM
Stocks quoted in this article:

Skeptical option players aren't buying the recent recovery attempt by Groupon Inc (NASDAQ:GRPN - 5.20) shares and are forecasting continued downside in the equity through the next several months. GRPN put volume was roughly three times greater than usual on Monday, and the 19,000 put shares traded easily outpaced call volume of 11,000 contracts.

Nearly all of this put volume was focused on a trio of strikes in the April series, as three blocks of 5,900 contracts changed hands. First, traders bought the April 4/5 put spread by selling the 4-strike puts for $0.60 each and buying the 5-strike puts for $1.15 each, paying a net debit of $0.55 per spread. This spread hits its maximum profit of $0.45 if GRPN is trading at or below the 4 strike at expiration and risks just the debit paid if the shares are at or above $5 when the options stop trading.

But there was more to this strategy. Similar to a bearish play Karee Venema covered in Yahoo! Inc. (NASDAQ:YHOO) yesterday, the put spread buyers helped finance the trade by selling out-of-the-money calls. A symmetrical block of 5,900 April 8-strike calls were sold for a net credit of $0.35 each, helping offset the cost of the put spread. If GRPN gains 54% to overcome the $8 mark between now and April expiration, traders selling the calls would likely be required to deliver GRPN shares at a per-share price of $8 (in the unlikely scenario that the traders are still holding the position).

While Monday's put action was decidedly bearish, we have seen some increased attention on the call side of late. The 50-day call/put volume ratio of buy-to-open activity on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 1.75, meaning 175 calls have been bought in the past 10 weeks for every 100 puts. During the last 10 trading sessions alone, however, this ratio weighs in at 3.68, with 368 calls being purchased for every 100 puts.

In the past month, GRPN has pulled itself back above its 50-day moving average for the first time since February. What's more, the stock has outperformed the S&P 500 Index (SPX) -- on a relative-strength basis -- by 10 percentage points in the past two months. But if Monday's put strategists are right, this attempt at a comeback will be short lived and any traders recently stocking up on long calls will be looking for new opportunities.


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