The Theory Behind Heavy Put-Selling On 2 Low-Priced Stocks

Options traders have targeted Glu Mobile Inc. (NASDAQ:GLUU) and Groupon Inc (NASDAQ:GRPN) for synthetic longs

Jan 25, 2017 at 3:08 PM
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When asked to identify stocks that offer potentially attractive trading opportunities, it's likely that mobile game maker Glu Mobile Inc. (NASDAQ:GLUU) and online discount marketplace Groupon Inc (NASDAQ:GRPN) don't immediately come to mind. Nevertheless, options activity has been accelerated of late for both low-priced stocks. Drilling down even further reveals that some traders may be using options to simulate stock ownership.

At first glance, call buyers at the major options exchanges have been notably active on both GLUU and GRPN in recent weeks. Over the past 10 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 10,205 calls on GLUU, compared to just 10 puts. Likewise, 11,937 long calls have been initiated on GRPN in the past two weeks, compared to 1,073 puts.

However, this activity has occurred in conjunction with heavy put selling on both stocks over the same time frame. Specifically, across the ISE, CBOE, and PHLX, 10,091 GLUU puts have been sold to open in the past 10 sessions, compared to just 10 that have been bought to open. It's a similar backdrop for GRPN, too, with 5,613 short puts initiated compared to 1,023 long ones in the last two weeks.

Diving deeper into the data reveals the call buying and put selling for each stock occurred on the same day in a spread strategy that is likely the due to the initiation of a synthetic long. For instance, GLUU's February 2 put and 2.50 call have seen the biggest rises in open interest over the past 10 sessions, with roughly 10,000 contracts added at each strike. Trade-Alert indicates the action occurred last Thursday, Jan. 19, when one trader bought to open the calls and sold to open the puts.

Similarly, the February 3 put and 4 call have seen the largest increases in open interest in GRPN's options pits in the past two weeks -- with 7,953 contracts added at the former, and 9,617 at the latter. The Trade-Alert trail leads back to Wednesday, Jan. 18, when several blocks of February 4 calls were bought to open at the same time as similarly sized lots of February 3 puts.

By initiating the split-strike synthetic long strategy, the trader ishoping to mirror the risk/reward profile of a stock purchase. Combining the short put and the long call allows the trader to profit on a move higher in the underlying. However, by lowering her cost of entry with the short put, she opens herself up to increased risk versus just buying the long call outright.

Looking at the charts, shares of Glu Mobile Inc. (NASDAQ:GLUU) were last seen trading down 0.4% at $2.33. The stock is down 15.5% in the last nine months, but recently overcame long-term resistance at the 200-day moving average. Groupon Inc (NASDAQ:GRPN), meanwhile, is up 0.5% at $3.51. The shares have surrendered nearly 41% since notching an annual high of $5.94 in August, but appear to have based in the $3.40-$3.50 neighborhood.

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