Like a modern-day “Kleenex” or “Scotch tape,” the company name “Groupon” (NASDAQ:GRPN) is now its own recognizable noun that people use to reference all sorts of online-coupon sites. And here is a nice Groupon for you. Well, not a coupon really, just a trading idea utilizing weekly options with the potential to book some quick cash.
This week, GRPN stock took a hit due to revisions in accounting that reflect not just poorly on earnings but poorly on management’s concern about how well it manages its money and financial reporting to investors. Management stated there was a “material weakness” in its internal controls and how it reported out certain financial data.
While most analysts felt these revisions were small and did not reflect on the possibilities of success or failure of the company and its business model, Wall Street did not like the news and the stock sold off almost 14% on Monday. The stock is now trading well below its IPO price of $20.
Is this a stock I would own? Nope; it’s too risky, especially if you need your capital to generate income. But take a quick look at the charts and recognize the sell off for what it is — a brief market overreaction to news — and you can make some quick cash by selling weekly puts.
Click to EnlargeThe GRPN April week-one 15-strike puts stop trading at Thursday’s close (due to Friday’s market holiday) and can currently earn you a credit of at least 25 cents, or $25 an option. If you sell a contract, you have to put up $1,500 in margin or cash and you can do this in a retirement account.
Your exposure to the market is one to two days, depending on when you open the position. If these puts expire worthless, you net a return of 1.7%, an annualized return (assuming you make 50 weekly trades) of 83%. Yes – no decimal point – 83%.
Risks? The stock can go down and you will have to roll the position forward by buying to close the original put and selling another one a week or a month out to stay cash-positive in the trade. I do it all the time; it’s a great way to reduce to almost zero the capital risk in a position.
One point seven percent in a couple of days – that is more than you can earn on a T-Bill in a year! If you executed positions only half as well throughout the year, you would still have a more than 40% yield on your capital.
Quite a Groupon, eh?
Michael Shulman is editor of Options Income Blue Print. Learn more about trading weekly options in this free short video. Michael does not currently own GRPN shares.