Groupon Inc (NASDAQ:GRPN) was one of the bigger winners for contrarian investors during the recently ended second-quarter earnings season. Groupon stock surged roughly 55% from July 27 through Aug. 8, after the company wowed investors with its quarterly report. Since topping out just shy of $6, GRPN has given back roughly 13% as the shares unwind post-earnings euphoria.
Even if you missed your pre-earnings opportunity, options traders may have another chance to profit on Groupon stock, as volatility is still the mix.
Click to Enlarge Starting off with a look at Groupon stock’s technical backdrop, GRPN’s recent decline shouldn’t worry stockholders too much. The shares were trading at heavily overbought levels in the week following earnings, meaning that an unwinding of these short-term buyers was inevitable. The key for Groupon stock is holding support at $5. This area is home to heavy call and put open interest, as well as GRPN’s rising 50-day moving average.
In light of second-quarter earnings, a continued pullback to $5 could be seen as a buying opportunity for long-term bulls.
Sentiment remains heavily bearish on Groupon stock despite the company’s stellar quarterly report. For instance, Zacks reports that analysts have issued just three “buy” ratings, compared to nine “hold” or worse ratings.
Furthermore, the 12-month price-target rests at $4.83, representing a discount of more than 7% for Groupon stock. Naturally, upgrades or price-target increases could be bullish for the shares.
The recently quarterly report hasn’t slowed GRPN short sellers either. During the most recent reporting period, short interest rose by 2% on Groupon stock, totaling 47.7 million contracts, or 11.82% of GRPN’s total float. That said, while there is fuel for a short-covering rally, it may take a breakout above $6 before these bears are shaken loose from their positions.
Judging by GRPN’s option open interest configuration, these short sellers may be preparing for just such an occasion. Currently, the September/October put/call open interest ratio for Groupon stock rests at a considerably bullish 0.29, with calls more than tripling puts among near-term options. Furthermore, this ratio falls to 0.17 when we zero in on just the October series.
Taking a closer look at October options, we find that implieds are pricing in a potential move of about 13% for Groupon stock. This places the upper bound at $5.86, while the lower bound lies at $4.52 from yesterday’s close.
The upper bound corresponds roughly with GRPN’s August highs, while the lower bound lies below support at $5 and the stock’s 50-day moving average at $4.78. A move to either extreme could elicit a bigger-than-expected move from Groupon stock.
2 Trades for Groupon Stock
Call Spread: For those traders willing to take a risk on a potential upside breakout for Groupon stock, an Oct $5.50/$6 call spread offers significant returns. At last check, this spread was offered at 11 cents, or $11 per pair of contracts. Breakeven lies at $5.61, while a maximum profit of 39 cents, or $39 per pair of contracts, is possible if GRPN closes at or above $6 when October options expire.
Straddle: On the other hand, there is plenty of volatility levied against Groupon stock, and the potential for a sizeable move in either direction is possible. With the Fed creating uncertainty on Wall Street, GRPN’s ultimate direction may be out of its direct control, but a breach of either of the aforementioned support/resistance levels could still create a much larger move than implieds are pricing in.
As such, traders might want to consider a Groupon stock straddle. A straddle involves the simultaneous purchase of an at-the-money call and an at-the-money put, and allows the trader to take advantage of a large move in the underlying stock regardless of the direction.
At last check, the GRPN October $5 straddle was offered at 74 cents, or $74 per pair of contracts. Breakeven for this trade lies at $5.74 on the upside and at $4.26 on the downside.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
