Who doesn’t like a deal? Whether it’s a discount at a restaurant, half-price tickets to a movie or 40% off a massage, when is it too much of a good thing? Yes, it’s true that discounts can be a good thing — especially in this economy — but sometimes you just have to say no. There are so many deals out there these days that it is impossible to say yes to all of them.
Here is a trade idea that can profit from a company that might be pushing too much of a good thing.
Groupon Inc. (GRPN — $7.40): Long Puts
The trade: Buy the Oct. 8 puts for 1.75 or less.
The strategy: The long put is one of the most basic option strategies. The strategy benefits from the stock trading lower. The trade profits if the stock falls and the put premium increases to an amount more than was paid. Maximum profit is almost unlimited only because the stock can fall to $0 (which is highly unlikely), and the maximum loss is $1.75 if Groupon (NASDAQ:GRPN) finishes at or above $8 at October expiration. Breakeven is $6.25 at expiration based on a $1.75 cost.
The rationale: Groupon launched in November 2008 and features daily deals of various activities in 48 countries around the world. When it was first introduced, it had a lot of people talking and a lot of people purchasing their discounted vouchers. Since it arrived on the scene, there has been stiff competition from competitors. Not only that, many consumers are purchasing the vouchers and never using them.
The company went public earlier this year at an original purchase price of $20 and has dropped to where it is currently trading. As of last earnings, Groupon is not profitable.
What is going to stop GRPN from sliding even lower? The stock has been in a pronounced downtrend since February and has even more room to drop. The company is scheduled to announce earnings Aug. 13. The stock looks like the epitome of a falling knife. Don’t get cut!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.