Trade Update, August 14th, 2012:
ENIS: When I executed the GRPN Jan13 6 / 4 1×2 put spread, I did it with the understanding that I would not likely see a very quick payout right after earnings, but I also would not see much of a loss. I expected that I would lose 0.10, or make 0.25 to 0.30, or be close to flat if the stock was flat, so I liked the risk/reward of the structure.
Well, with the stock down close to 25%, the 1×2 put spread has a current bid/offer of 0.25 at 0.55, on a spread I paid 0.21 for. I am offering the spread at 0.50, though I don’t expect to get filled there today. The reason is that the implied volatility stayed more elevated that I expected when I initiated the trade yesterday (meaning the Jan13 6 and 4 put lines are both worth about 0.10 more than I expected, so my spread is about 0.10 less). However, there is no reason to try to get out of this trade quickly, as the structure is still basically a flat delta, meaning the price of the structure should not move much from here whether GRPN stock goes up 50 cents or down 50 cents. More importantly is how the implied volatility moves in GRPN. I plan to sit on this trade for now, with my 0.50 offer out in the market, but no rush to close out the position.
DAN: Enis had the direction right and the magnitude, and in hindsight, ratios were the only way to play given how expensive the options were in front of the print.
As for my trade, I got the direction wrong and now my trade is worthless. The Aug 10 calls and the Sept 10 calls are both offered at .05 I will now just wait for Aug to expire worthless and leave on the Sept 10 calls, as no use offering them at pennies, and you never know, maybe a pop in the stock allows me to get out for .10 or more btwn now and Sept expiration, not holding my breath, but you never know.
Original Trade, August 13th, 2012:
We took a hard look at a whole host of different trades after writing the preview of tonight’s earnings report. Dan and I arrived at entirely different trades that we executed, both detailed below:
ENIS: When looking for potential GRPN trades, my main focus was on finding an options trade that offered favorable payouts whether the stock was up, flat, or down. With the stock all the way down to $7.7o, I don’t have much confidence playing for more downside, but I also think GRPN is a broken story, so I don’t have much faith in the upside play either. Rather, I wanted to see if I could find a structure that was more neutral on direction, but offered good risk/reward scenarios. In the end, I decided to execute the following trade, and I’ll explain why in a moment:
TRADE: GRPN ($7.65) Bought the Jan13 6 / 4 1×2 put spread for $0.21
-Bought 1 Jan13 6 put at 1.33
-Sold 2 Jan13 4 puts at .56 each, for a total credit of 1.12
Break-Even On Jan13 Expiration:
Profits btwn 5.79 and 2.21, make up to 1.79, max gain of 1.79 at 4 on Jan13 expiry
-Losses of up to 0.21 btwn 5.79 and 6.00, loss of 0.21 above 6.00. Losses of up to 0.21 btwn 2.21 and 2, continued losses below 2.00, for a max loss of 2.21 if stock goes to 0.
Why did I choose this structure, and what are the risks?
At initiation, the delta of this structure is 0. That means that the structure should not be influenced initially by whether the stock goes up or down. At first glance, it seems like this trade is a bearish bet. But since there are 5 months until expiry, the structure will not act that bearish for the next few months, as the lower strike 4 puts will decay faster than the 6 puts as long as the stock stays elevated. Here is the way I thought about this trade ahead of tomorrow’s earnings:
1) What happens to the structure if GRPN is up 25% tomorrow?
I anticipate my 1×2 put spread will be worth around 0.10-0.15, so my mark-to-market loss will be around 5-10 cents on the structure.
2) What happens to the structure if GRPN is flat tomorrow?
I anticipate that the 1×2 put spread will be worth 0.25-0.30, so a 5-10 cent mark-to-market gain because of the volatility crush
3) What happens to the structure if GRPN is down 25% tomorrow?
I anticipate that the 1×2 put spread will be worth 0.45-0.55, so a 0.25-0.35 gain on the structure as the trade picks up short delta on the downside (meaning it starts to make money on the direction of GRPN going lower).
As a result, I like my chances for this trade. I feel like my potential loss is smaller than my potential gain, and I have more scenarios where I think the trade will be profitable. Again, I don’t have a strong opinion on trade direction, but the structure offers me flexibility, and good risk/reward.
DAN: While I don’t dislike Enis’s 1×2 Put Spread, as I also feel this company could some day go the way of the DoDo Bird, I am more interested in playing for a move not too different than what we saw after the company reported their Q1 results in May. While I have no reason to believe one way or another they will have a beat and raise, I like the set up for Call Calendars.
TRADE: GRPN ($7.65) Bought the Aug / Sept 10 Call Spread for .25
-Sold 1 Aug 10 Call at .23
-Bought 1 Sept 10 Call for .48
Break-Even on Aug Expiration:
-Max risk is .25.
-If stock is 10 or below on Friday’s close (Aug Expiration) I essentially own the Sept 10 call for .25.
-If the stock makes a significant move close to or near my strikes I will have the opportunity to make the difference btwn the Aug Call that I am short and the Sept Call that I am long.
* As far as execution is concerned, I the bid ask spread on this Calendar was .20 at .35, I put in a .25 limit order to buy it and got filled.
Trade Rationale: At this point, after getting the direction right since last Dec (read previous trade here) I am not willing to press the short, even after what we saw happen with ZNGA just a couple weeks ago. So my trade has less to do with me not liking Enis’s structure or his directional call, but more to do with the fact that after being contrarian to the downside back in Dec, I would rather once again lean contrarian here.
Obviously I need to get the direction right, but if the stock is flat to down following results, the Sept 10 calls are likely to hold some value and at that point I can look to spread the Sept calls once my Aug’s have expired worthless.
AS FAR AS CONVICTION, IF I NORMALLY DO 2% TRADING POSITIONS I AM ONLY DOING 1% ON THIS ONE. I LIKE THE TRADE, BUT IT COULD BE RATHER BINARY, IF THE STOCK CRATERS, THE SPREAD WILL BE WORTHLESS.
Original Post Aug 13th, 2012 @ 12:19pm:
Event: GRPN reports its Q2 earnings tonight after the close, the options market is implying about a 25% move (with the stock at about 7.50 and the Aug 7/8 Strangle offered at 1.60, you would need the stock at or below 5.40 or at or above 9.60). In mid-May when the company reported Q1 the stock initially gapped up close to 28% only to close up 3.87%. After their first qtr as a public company that was reported in February, the stock was down close to 14%, so limited but volatile history.
Sentiment: Wall Street analysts have become a tad less optimistic of late on the stock with 9 Buys, 13 Holds and 3 Sell ratings and a 12 month avg price target of $15, 100% higher than current levels, and 25% below its November 2011 IPO price. Short interest sits at 16% of the float, which frankly I expected to be higher.
Price Action: Since reporting what initially appeared to be a blowout Q1 back in mid-May, GRPN shares saw a 50% gain at one point btwn the day of earnings and the opening gap higher. The stock has since been essentially cut in half on concerns about the quality of the growth and fears of deceleration due to economic headwinds and competition. Looking at the chart is essentially useless as the stock has basically been in a massive downtrend since the opening gap to about $30 on its IPO day to its current levels which sit about a buck above the all time lows.
Volatility: It’s tough gauging historical volatility in a stock that was in the 20’s but is now single digits as the past isn’t that helpful for what are now dollar cheap options. Here’s a look at the past year of vol moves. As one would expect, the implied volatility (red) across all months is trending higher over time as the stock gets lower in price. This earnings will see the highest IV of any of its previous events in the short history of the stock.
You can see what happens in a low dollar volatile stock going into an event as the implied vol in the Aug18 weeklies is around 300. For comparison, the October options are about 120.
Q2: EPS= .03, Revs= $575M (Guided $550-$590M)
Q3: EPS= .05, Revs= $607M
2012: EPS= .18, Revs= $2.4B
MY VIEW: Frankly I don’t have a strong view on this company aside from the fact that I would never use their products, and from what I can tell the people around me who were once big proponents of the product are much less so now than they were a year or 2 ago. I have long thought that the offering smacked of a fade as the next new thing on the web, and that the barriers to entry were not very high.
Late last year we put on what we call the “Terminal Short” structure on GRPN, the long dated 10×5 1×2 Put Spread when the stock was $22.43 and last month took the balance of the position off when the stock was down more than 50% from the those levels.
At this point it is hard to be too negative on the stock with a short term time horizon. Unless we get a massive cut to forward guidance, I have to assume that there is a good bit of bad news in the stock at current levels, especially when you consider the stock’s recent plunge in sympathy with FB and ZNGA (while having nothing to do with either company aside from the recent IPO status and dumb valuation and similar holders).
BUT the extremely high implied move may provide near term trading opportunities, check back later as we are looking at ways to play.