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One Optimistic Groupon Inc (GRPN) Trader Keeps the Faith

GRPN call buyer rolls out his out-of-the-money bet

by 6/7/2013 1:02 PM
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Up 2% to trade at $6.84 today, Groupon Inc (NASDAQ:GRPN) has captured the attention of bullish option traders. This is a shift from the trend toward put buying we recently observed. In the last two weeks, more than 1.5 puts have been bought to open for every call on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The resultant put/call volume ratio of 1.56 is just 2 percentage points from an annual peak. In simpler terms, option buyers have rarely shown as much demand for long puts as they have during the past two weeks.

Today, however, roughly 24,000 calls have traded, which is a 42% mark-up from typical intraday volume. By contrast, fewer than 3,000 puts have changed hands. Two strikes seeing notable attention today are the June 8 call and the July 8 call, and it appears as though the same trader is responsible for the heavy volume at both strikes. Each has seen more than 4,000 contracts trade, with two large blocks paired off between the front-month and back-month positions in morning trading.

Simply, it looks as though the June calls are being sold to close at or near the bid price of $0.03 per contract, while the July positions are being purchased to open at or near the ask of $0.18 per contract. This newly initiated, back-month position now carries a breakeven price of $8.18 (the strike price plus the premium paid), or the level at which Groupon Inc (NASDAQ:GRPN) will need to be trading at come expiration Friday to place the call buyers in profitable territory.

Delta on the July 8 call has inched up to 0.25 from 0.22 today. In other words, the options market is pricing in a 1-in-4 chance the option moves in the money by expiration on July 19. Of course, these call buyers can exit the positions at any time before then (in order to take profits or contain losses), by either closing the position entirely or (again) rolling it to a later-dated series. Either way, losses for call buyers are capped at 100% of the premium paid.

As mentioned, GRPN is moving higher today after bouncing off its 40-day moving average in yesterday's trading, The shares have gained more than 40% so far in 2013.


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