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Last-Minute Bulls Hopeful Before Groupon Inc (GRPN) Earnings

Groupon Inc weekly options grow in popularity ahead of tonight's earnings report

by 5/6/2014 1:09 PM
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With quarterly earnings set to hit the Street in a few hours, the Groupon Inc (NASDAQ:GRPN) options pits are notably active. Call volume is three times greater than usual (and nearly twice the pace of puts), but put volume is also elevated, at more than twice what's typically seen around midday.

Attracting notable attention is the weekly 5/9 8-strike call, where more than 5,000 contracts have swapped hands. Implied volatility has spiked more than 26 percentage points at this strike, and volume easily outweighs existing open interest, suggesting the creation of new positions.

While the International Securities Exchange (ISE) indicates a modest portion of this volume was sold to open, Trade-Alert suggests many of these calls were purchased as aggressive bets on a steep post-earnings rally. The calls have traded for a volume-weighted average price of $0.10, which is equal to the maximum risk if GRPN is still trading south of the 8 strike at Friday's closing bell, when the weekly options stop trading. Of note, Groupon shares have not traded above $8 since early April, and were last seen down 0.7% at $6.84.

Long calls have been popular for several weeks now on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Specifically, Groupon's 50-day call/put volume ratio of 3.78 ranks higher than 93% of all annual readings. Because nearly 15% of the stock's float is sold short, however, some of this activity could have been the work of short sellers hedging their bets ahead of tonight's quarterly event.

As noted, the daily deals publisher is scheduled to report first-quarter earnings after the close, and option bulls are likely hoping that past is not prologue. As my colleague Andrea Kramer pointed out in yesterday's Earnings on Deck, Groupon shares haven't fared well (on average) following the company's past earnings reports, despite matching or exceeding analysts' bottom-line estimates the majority of the time.

When looking at individual post-earnings reactions, Groupon Inc (NASDAQ:GRPN) has experienced some dramatic price swings. Last quarter, the stock dropped nearly 22% the day after its results, but a 21.6% gain came last August the day after the company's second-quarter report. Groupon's weekly 5/9 at-the-money (7-strike) straddle is currently priced at $0.83 per pair of contracts. The options market is therefore pricing in an approximate move of 12.1% (higher or lower) between now and the end of the week.


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