Groupon (NASDAQ:GRPN) is trading around 15% lower today and put sellers are taking advantage of this opportunity to collect inflated put premium. Late Friday, the daily-deals company restated its fourth-quarter earnings results, and the information wasn’t pretty.
Company officials blamed the news on higher-than-expected customer refunds. Revenues were actually $492.2 million, good for a net loss of $65 million, versus the originally reported net loss of $43 million. Adding insult to injury, Groupon said its first-quarter revenue outlook was $510 million to $550 million, slightly below Wall Street’s current outlook.
This morning, the company was greeted with a host of downgrades and price-target adjustments. Among them: Bank of America/Merrill Lynch lowered its rating to neutral from buy and Stifel Nicolaus adjusted its outlook to sell from hold. The average 12-month price target still stands at $24.88, almost 60% above the stock’s current price of $15.75. We could see analysts continue to reduce their price targets in the coming days and weeks.
The options-trading community saw a silver lining to Groupon’s decline, however, catching a whiff of increased put premiums and selling longer-term out-of-the-money put options. More than 7,000 of the January 2013 13-strike puts traded versus existing open interest of 1,434. (This implies that the volume consisted of opening positions). Overall, nearly 40,000 options had changed hands in GRPN by mid-afternoon Monday, the majority of which traded on the put side. This compares to average daily option volume of 22,000 contracts.
optionMONSTER indicates that these January puts were sold for an average price of $2.50 per contract. If GRPN still is trading above the sold strike ($13) when these options expire in 9.5 months, the puts will expire worthless and the put sellers will keep this premium as profit.
The maximum loss for this position is $10.50 (strike price less the credit collected) and occurs in the unlikely event that GRPN plunges to zero ahead of January options expiration. Breakeven also is at $10.50. If GRPN shares are trading above this level when the options expire, the sold put strategy will be profitable (at expiration).
Click to Enlarge This breakeven level is 33% below the stock’s current price, so the put sellers aren’t necessarily bullish on the stock, but they do feel confident in its ability to stay at current levels (or at least not drop that much). The profit/loss diagram below illustrates what this option looks like at expiration.
Delta for this put is 20%, meaning there is currently a 20% chance of the put being in-the-money by expiration. For these put sellers, that means there is an 80% chance of the put being out-of-the-money, and therefore a successful trade. (For more information on how put sellers can use delta to their advantage, check out this piece from Tyler Craig.)
As of this writing, Beth Gaston Moon did not hold a position in any of the aforementioned securities.