Expectations are exceedingly low for Groupon Inc. (GRPN) as the company prepares to release its fourth-quarter earnings report after the close tomorrow afternoon. With Groupon stock trading at all-time lows, you might think there are scant opportunities for options traders. However, there are still ways to profit from GRPN options with the right trade setup.
Diving into the numbers, Wall Street is looking for earnings to drop from a profit of 6 cents per share to zero, while revenue is seen dropping 8.6% to $845.9 million. Guidance is also expected to be lower, though many investors are looking for a potential buyer to take over.
Aside from a few whispers, sentiment is heavily bearish on Groupon stock heading into the report. On the bright side, EarningsWhipser.com reports that the whisper number for Groupon’s fourth-quarter report comes in at 2 cents per share, better than the breakeven consensus.
There is some history to support an earnings beat, as Groupon has missed Wall Street’s targets only twice in the past two years. Still, those targets were lowball expectations, and Groupon continues to guide lower, creating a downward spiral for Groupon stock.
Analyst ratings tell the real tale for Wall Street expectations. According to Thomson/First Call, Groupon stock has attracted just four buy ratings, compared to 15 holds and two sell ratings. The 12-month price-target is a bit skewed by GRPN trading in the single digits, arriving at $3.60 per share and representing a weighty premium of 64% to the stock’s current trading range.
Short sellers have also placed sizable bets against GRPN. As of the most recent reporting period, some 76.4 million GRPN shares were sold short, representing about 20% of the stock’s total float. While there is ample fuel for a potential short-covering rally, GPRN has shown no signs of forcing these bears to cover their bets.
That said, short sellers are showing some signs of caution, judging by Groupon’s options backdrop. Currently, the February put/call open interest ratio for Groupon stock rests at a middle-of-the-road 0.89, with calls just edging out puts among near-term options. This ratio falls to a more bullish 0.61 in the weekly February 12 series, hinting that short sellers may be buying calls as protection.
Overall, weekly February 12 series implies are pricing in a potential post-earnings move of about 10.7% for Groupon stock. This places the upper bound at $2.50, while the lower bound lies at $2.00. Technical resistance is strong overhead, with GRPN’s 10-day and 20-day moving averages hovering in the $2.50 range, while only psychological support lies at $2 to prevent a continued decline.
2 Trades for Groupon Stock
Put Buy: Traders looking to jump on the bearish bandwagon ahead of earnings might want to consider buying a February $2.50 put. At last check, this option was offered at 37 cents, or $37 per contract. Breakeven lies at $2.13, while significant gains could be possible if GRPN breaches $2 and heads lower before February options expire.
Call Spread: For traders willing to take a risk on a potential earnings beat or any other positive news not already factored into the shares, a call spread may offer significant returns. Those so inclined (and with trading nerves of steel), might want to consider a February $2.50/$3 bull call spread.
At last check, this spread was offered at 7 cents, or $7 per pair of contracts. Breakeven lies at $2.57, while a maximum profit of 43 cents, or $43 per pair of contracts, is possible if GRPN closes at or above $3 when February options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
