Update Dec 1st, 2011: This thing has been all over the place, I got the direction right, but timing and the magnitude wrong. Since putting this calendar on a couple weeks ago, the stock went down 30% breaking through the ipo price and since mid last week is now up about 25%. At one point last week this spread was worth half its original value.
Now with the stock back at 18.55 I am going to sell the spread that I paid 1.20 for at 1.25 for a small gain. I will look to really short for a more direction play on a rally.
Given the Volatility in the name of late I am gonna to consider a .05 gain a massive victory and look to reassess a way to play.
Original Post Nov 14th, 2011: Groupon (GRPN): The Options Are as Overvalued as the Stock, A Way to Play
Groupon options were listed today and as one might expect the implied volatility is through the roof and as a result of the ridiculously high rates to borrow the stock to short, the puts are trading at a fairly dramatic premium to the calls.
I have not looked at the GRPN story in any meaningful way, but I will tell you there is a distinct possibility I may live my entire life without using it and I certainly wouldn’t buy the stock of the next fad internet thingy….now I know I know, a lot of you have been told by your broker or some banker on TV or some tech VC that the chance to buy GRPN just $4 above its IPO price is like buying EBAY in 1997……….and it may be, but I would argue the barriers to entry to this business aren’t great and that at any point, AMZN, GOOG or Facebook could make a strong dent into their market-share, let alone the actual retailers or service providers they offer the deals from…..
My strong feeling is that this is a fad, not like I think social media is, clearly a fad with legs, but the company has cashed in near term on the scarcity of so few mature web companies ready to come to the public markets. There is no doubt about it the company’s sales are growing like weeds yoy, but with a valuation that more than compensates that fact at about 12x sales I would wait for their first miscue as a public company before buying in, and trust me that is coming to a theater near you. Here’s the trade:
As many of you know already shorting names like this can be hazardous to your portfolio’s health from a risk standpoint and financing the borrow, but using options to tactically benefit from the sale of one option to finance the purchase of another seems to be the only way to trade a stock like GRPN.
GRPN (~$24.00) Bought the Dec / Jan 20 Put Spread for ~1.20
-Sold 1 Dec 20 Put at 1.12
-Bought 1 Jan 20 Put for 2.32
Break-Even on Dec Expiration:
If stock is 20 or higher on Dec expiration than the Dec 20 Put I am short will expire worthless and I effectively own the Jan 20 Put for 1.20. At that point I will likely sell a further downside Put in Jan to create a put spread and thus further define my risk. The max loss on a move higher or lower is the 1.20 in premium I paid for the stock.
-As would be expected the bid/ask is wide and it was imperative to use limits……
TRADE RATIONALE: I think there is a very good chance that the stock will be above 20 for the better part of this year even if the market turns lower. The underwriters of the IPO and the new large public shareholders will likely defend that psychologically important level so the deal is not a loser on it’s first year. I also feel that there are no shortage of sellers from the IPO and that there isn’t likely an event that I can put my finger on that could cause the stock to rocket higher in the coming weeks. So I feel there is a strong likelihood that come the new year the stock price will be left to “float” a bit more and that you could see a breach of the $20 IPO price.
This trade has very little to do with the vol differential btwn the option that I am selling and the one that I am buying, but more to do with the mechanics and the calendar……
One last point of this trade, I believe that if the market rallies into year end that January could get a little ugly and stocks like GRPN could under-peform in a market that is no longer being propped up by those looking to mark positions into yr end. That is why the calendar spread is so tight.
Update Nov 14th 3:45pm: someone just forwarded me this link from BusinessInsider (henry Blodget’s) take on GRPN pre-IPO: http://www.businessinsider.com/how-much-is-groupon-worth-2011-10