Groupon Option Premiums Get Rich as Earnings Approach

An upside surprise from Groupon could spark a short-squeeze rally

Feb 13, 2018 at 11:21 AM
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Online discount marketplace Groupon Inc (NASDAQ:GRPN) is set to report fourth-quarter earnings before the market opens this Wednesday, Feb. 14. Analysts, on average, are looking for a profit of 9 cents per share, up from 7 cents in the year-ago quarter -- but judging by widespread pessimism on Wall Street, quite a few bears are looking for GRPN to fall short of the consensus forecast.

Bears Bet Against the Online Coupon Giant

Starting with the shorts, the number of GRPN shares sold short ballooned by 26.7% over the past two reporting periods. These bearish bets now represent 13.2% of the equity's float, or six times Groupon's average daily trading volume. In fact, it's been nearly a year since short interest on GRPN was this high -- and for the record, the shares have rallied about 11% since that mid-February 2017 reporting period.

Options traders are also leaning toward the skeptical end of the spectrum, as evidenced by Schaeffer's put/call open interest ratio (SOIR) of 0.46, which registers in the 94th percentile of its annual range. This lofty ranking indicates that short-term speculators have been more put-heavy on GRPN only 6% of the time in the past year.

Analysts, likewise, are less than enthused about Groupon's prospects. There are only four "strong buy" ratings on the stock, compared to 11 "hold" or "sell" suggestions. Plus, the average 12-month price target of $5.47 is just a chip shot from GRPN's current price of $5.12.

GRPN Stock Holds Trendline Support Ahead of Earnings

Given this glut of negativity, it's interesting to note that GRPN appears to be holding up pretty well on the charts. While the shares were rocked by the recent bout of broad-market volatility, downside was contained by support at the $5 level, which is currently home to the security's rising 126-day moving average (equivalent to roughly half a year's worth of trading days).

grpn daily one-year chart

Beware of Pricey Pre-Earnings Options Premiums

Looking back, GRPN has a history of making volatile moves in the immediate wake of its quarterly reports. Over the past eight quarters, the stock has registered an average one-day move of 18.9% after earnings, according to Trade-Alert -- and this time around, the options market is pricing in an even steeper 26.2% post-event price swing.

So while the combination of strong technical support and widespread pessimism is compelling from a contrarian perspective, it's a less than ideal time to bet on GRPN's earnings move via options. Instead, traders might look to play a follow-through move by targeting a longer-dated Groupon option.

For example, the weekly 3/2 expiration series is pricing in at-the-money implied volatility (ATM IV) of just 101.32%, per Trade-Alert -- less than half the 224.73% volatility priced into weekly 2/16 options. And looking at monthly March options, GRPN's ATM IV falls to a comparatively modest 82.07%.


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