GRPN September 12th Options Begin Trading

The article details two options strategies for Groupon (GRPN) at a stock price of $31.55. Selling a $31.00 strike put for $1.45 offers a potential cost basis of $29.55 and a 4.68% yield (39.70% annualized) if the option expires worthless, with a 59% probability. Concurrently, a covered call strategy, involving buying shares and selling a $32.00 strike call for $1.75, could yield 6.97% if assigned or a 5.55% yield (47.08% annualized) if the call expires worthless, with a 45% probability. These strategies provide investors with structured approaches to either acquire GRPN shares at a discount or enhance returns on existing positions, against an implied volatility around 90%.

Analysis

The provided text outlines two distinct, income-generating options strategies for Groupon (GRPN) based on its current stock price of $31.55. The first strategy, selling a cash-secured put at the $31.00 strike, offers a $1.45 premium, effectively lowering the potential purchase price to a cost basis of $29.55. This out-of-the-money put has a 59% statistical probability of expiring worthless, which would result in a 4.68% return on the cash commitment (39.70% annualized). The second strategy is a covered call, involving the sale of a $32.00 strike call for a $1.75 premium against a long stock position. This approach could yield a total return of 6.97% if the stock is called away, or a 5.55% premium boost (47.08% annualized) if the call expires worthless, an outcome with a 45% probability. Both strategies are underpinned by high volatility, with implied volatility for the options at 90-91%, slightly above the stock's actual trailing twelve-month volatility of 86%, indicating that the options market is pricing in significant potential price movement and compensating sellers with rich premiums.

Key Decisions for Investors

• Investors with a bullish-to-neutral outlook on GRPN could consider selling the $31.00 put to either acquire shares at a discounted effective cost basis of $29.55 or generate a 39.70% annualized yield on cash if the stock remains above the strike.
• Current GRPN shareholders seeking to generate income may find the covered call strategy at the $32.00 strike attractive, but must accept a capped total return of 6.97% and the risk of having their shares called away if the stock price rises above $32.00.
• Given that implied volatility of 90-91% is elevated relative to the 86% historical volatility, investors should recognize that these strategies involve taking a position on high short-term price risk, and the premiums reflect this uncertainty despite the stated probabilities.