It’s been a tough several months for Groupon (GRPN) stockholders, but things might just be ready to wheel back around.
After shedding more than 40% of its value since February, Groupon stock appears to have found a floor in the past couple of weeks in the $4.50 region. This baseline arrives just as Groupon prepares to release its second-quarter earnings report Friday morning, creating a potential trading opportunity.
Groupon Earnings Estimates and Sentiment
By the numbers, Wall Street expects Groupon’s second-quarter earnings to triple to three cents per share from a penny per share in the same quarter last year. Revenue, meanwhile, is seen flat to lower at $740.25 million. That said, some analysts are setting the bar even higher, with EarningsWhisper.com reporting a second-quarter whisper number of 5 cents per share.
Taking a closer look at the brokerage community, we find that while there is a considerable wait-and-see attitude when it come to GRPN stock. According to data from Thomson/First Call, GRPN has attracted seven “buys” and 14 “holds.” There are currently no “sell” ratings, which is notable given the stock’s decline so far this year.
While analysts could certainly take a rebound in GRPN stock in strike, the short-selling community could be caught completely flat footed. Following a 3% rise in short interest during the most recent reporting period, roughly 79.5 million GRPN shares are now sold short. This short position represents a sizable 16% of the stock’s total float (or shares available for public trading), creating a potential short-squeeze situation on solid Groupon earnings.
On the options front, speculative traders appear to be bullish, if cautiously so. Specifically, the August put/call open interest ratio currently rests at 0.64, indicating a healthy degree of call open interest without being overly optimistic. This ratio dips nicely to 0.6 for the weekly Aug 7 series (i.e., the options most affected by Groupon’s earnings).
Click to Enlarge Overall, weekly Aug 7 series implieds indicate that traders are expecting a post-earnings move of about 13% for GRPN stock. This places the upper bound at $5.10, while the lower bound lies near $3.91. A breakout above $5 could be huge for Groupon, setting up a confrontation between the stock and its 50-day moving average. On the downside, support near $4 should help limit long-term losses for the stock.
2 Trades for GRPN Stock
Call Spread: GRPN has a great deal of upside potential, and a rally could be exacerbated by an exodus of short positions. As such, traders looking to bet bullish on GRPN might want to consider an Aug $5/$5.50 bull call spread. At the close of trading on Tuesday, this spread was offered at 14 cents, or $14 per pair of contracts. Breakeven lies at $5.14, while a maximum profit of 36 cents, or $36 per pair of contracts, is possible if GRPN stock closes at or above $5.50 when August options expire.
Put Sell: If trading off support is more in line with your trading strategy, then a weekly Aug 7 series $3.50 put sell may be what you are looking for. After the close on Tuesday, the weekly August 3.50 put was bid at 2 cents, or $2 per contract. If you’re willing to risk it, you can double the premium received by selling the Aug $4 put, which closed Tuesday with a bid of 4 cents, or $4 per contract.
On the upside, you keep the premium received as long as GRPN stock closes above $3.50 (or $4) when August options expire at the end of this week. On the downside, should GRPN trade below the sold strike ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $2 (or $4) per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
