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Option Brief: Groupon Inc (NASDAQ:GRPN) popped 2.1% on Tuesday to finish the session at $6.35 -- and above its 40-day moving average for the first time since Feb. 10. Against this backdrop, calls traded at a 38% mark-up to the average daily pace, while fewer puts than expected were exchanged. Short-term options were in demand, as evidenced by the equity's rising 30-day at-the-money implied volatility, with a number of traders targeting a move north of $7 over the next several weeks, or perhaps hedging against one.
Specifically, GRPN's June and July 7 calls were the two most active options of the day, where a collective 7,872 contracts changed hands -- mostly at the ask price, pointing to buyer-driven volume. What's more, open interest rose at both strikes overnight, making it safe to assume new bullish positions were initiated.
The front-month calls were purchased for a volume-weighted average price (VWAP) of $0.02, making breakeven at this Friday's close $7.02 (strike plus VWAP), which is when the June series of options expire. Gains are theoretically unlimited with each step above here GRPN takes, while losses are capped at 100% of the premium paid, should the stock settle south of the strike at expiration.
Due to the additional time premium, the VWAP for the back-month calls is $0.16, making at-expiration breakeven $7.16. As indicated above, profit for the call buyers will accrue with each additional notch above here GRPN is sitting at the close on Friday, July 18 -- when the July series of options expire -- while risk is limited to the initial cash outlay, if the security closes south of $7 at expiration.
This bullish positioning is a bit surprising, given GRPN's long-term technical struggles. Year-to-date, the shares have swallowed 46% of their value. What's more, the stock has not traded north of the $7 mark since early May, and as such, delta on the June 7 and July 7 calls are docked at a respective 0.11 and 0.28, suggesting slim chances of in-the-money finishes.
However, with more than 15% of Groupon Inc's (NASDAQ:GRPN) float currently sold short, a portion of Tuesday's call buying may have been a result of shorts continuing to hedge against any additional upside. Regardless of the reason, now is an opportune time to scoop up short-term options on GRPN at a bargain. In fact, the equity's Schaeffer's Volatility Index (SVI) of 49% ranks lower than 93% of similar readings taken in the past year, meaning premium on GRPN's near-term options is relatively inexpensive at the moment.