Jim Cramer said Groupon Inc (NASDAQ:GRPN) “is a beast” today on CNBC. All I know is that if I can find it on Groupon, that’s where I’m buying it. The company isn’t going anywhere, and that’s enough for me to trade GRPN stock virtually worry-free.
I could spend an hour dissecting the technical aspect of Groupon’s price charts and poring over its fundamentals, but I won’t. Why not? Because GRPN options give the flexibility to create income based on the aforementioned logic without even spending a penny out of pocket.
I want to sell downside risk against levels I deem safe. This is, as I like to say, the equivalent of me selling someone else a losing lottery ticket. I’ll collect the premium today, but it won’t be mine to use until the contracts expire or I close the trade. If the price of GRPN stock stays above my level, I win the bet — and whoever bought the lottery ticket loses their price premium to me.
How to Trade GRPN Stock Here
The bet: Sell a GRPN Jan 2018 $3 put for 40 cents to open. By selling naked puts, I commit to buying the stock at that price if it falls below it. So my breakeven price is $2.60 per share. I feel comfortable owning Groupon stock at $2.6 should the worst-case scenario happen. This would be close to the all-time low in the stock.
A really bullish trader could spend the premium on buying calls to further make their position in GRPN stock even more bullish. That’s not for me. I have more faith that buyers will step in to support the stock on dips than I am of chasing the rallies.
Usually I like to balance my trades by selling opposing bearish risk, but in this case, I feel like I would be opening myself to undue risk. So I will leave this trade one-sided as written.
I am not required to hold my trade through its expiration. I can close it at any time for partial gains or losses. Also, I could buy sacrifice May puts for 3 cents if I so feel too worried about a complete collapse.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.