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Pre-Earnings Call Buying Heats Up On Groupon Inc (GRPN)

Groupon Inc tends to struggle after reporting earnings, but calls are heating up

by 7/28/2014 11:32 AM
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Groupon Inc (NASDAQ:GRPN) calls are trading at double the intraday average this morning, and outstripping puts by about five times. Short-term contracts are in demand, too, per the stock's 30-day at-the-money implied volatility (IV), which is 1.4% higher at 69.7%.

The most sought-after GRPN strike so far is the August 7 call, where nearly 2,500 contracts are on the tape. The majority have changed hands at the ask price, and IV is trending higher, collectively hinting at buy-to-open activity. By purchasing the out-of-the-money calls for a volume-weighted average price (VWAP) of $0.20, the speculators are expressing confidence that GRPN will topple breakeven at $7.20 (strike plus VWAP) by the close on Friday, Aug. 15, when the front-month options expire. Additional gains are theoretically unlimited beyond this point, while potential losses are capped at the initial premium paid, should the contracts expire out of the money.

Today's options players, however, may not be bullish toward GRPN . After all, short interest on the coupon name spiked nearly 10% during the most recent reporting period, and now comprises roughly 21% of the equity's float. This isn't surprising, either; the shares -- despite rallying over 2% today to trade at $6.34 -- are down more than 46% year-to-date, and haven't closed north of $7 since May 2. All told, this morning's call buyers may be short sellers picking up the contracts as short-term protection.

Lending credibility to that thesis: Groupon Inc (NASDAQ:GRPN) is slated to report second-quarter earnings next Tuesday afternoon. While the shares have averaged a loss of 10.5% in the session subsequent to the company's last eight turns in the confessional, GRPN gained 21.6% in a single day following last August's event. In other words, while history appears to favor a short stock position, an upside hedge may be a smart play.


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