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Bearish GRPN Options Flow Into Earnings

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Stocks in this article: GRPN

Groupon (GRPN) is seeing increased options activity ahead of earnings. The company is due to report quarterly results after the closing bell Thursday and some investors have been opening new positions in Weekly options that expire this Friday. The overall flow seems to be expressing concerns that shares might fall on the results. Indeed, a big post-earnings move is expected. Here's why.

GRPN is down $0.07 to $10.50 today, but up 116% year-to-date. Meanwhile, bearish three-way spreads were opened on the stock Monday. The focus was on the Weekly options that expire on November 8. In afternoon trading, an investor was selling 7,900 Weekly 12 calls on GRPN at $0.25, buying 7,900 Weekly 10 puts for $0.49, and selling 7,900 Weekly 9 puts at $0.14. In other words, 12 calls were sold to buy 9 - 10 put spreads. The investor paid $0.10 for the package, 7,900X.

The bearish three-way spread in the Weekly options on GRPN traded 16,000X on Monday and today's open interest data confirm that new positions were being opened. If so, the investor sees limited upside for GRPN and is writing upside 12 calls that expire at the end of the week. At the same time, they are buying 9 - 10 put spreads for downside exposure through the earnings report. The potential profit is $1 (minus the $0.10 paid for the spread) if shares fall to $9, or less, through the end of this week. There is additional upside risk if GRPN rallies to beyond $12.

A shareholder possibly initiated the big three-way spreads in GRPN to hedge the earnings risk and, if so, they are stating that they're willing to sell the stock for $12, or have it "called away" at the call option strike. The put spread serves as a hedge or protective strategy. Indeed, the stock is sometimes a big earnings mover. The average daily post-earnings move over the past four quarters is 16.3%, including a 21.6% jump on August 8, 2013. Analysts expect the company to post a quarterly profit of $0.02 per share, compared to $0.00per share a year ago.

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At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.

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