Play the Groupon Earnings with Covered Calls

Submitted by Stockmaster2 on Tue, 02/07/2012 - 18:41

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Groupon (GRPN) is releasing earnings after the bell tomorrow, February 8th. Consensus estimates are EPS of $.03. Here's how we think you should play the earnings call.

Shares are currently trading at $23.61 a share, and Call options that are expiring next Friday, February 17th are trading at a premium right now.

A good trade right now if you think GRPN shares are going to trade sideways or slightly up is to sell covered calls for the February 17th strike.

The $24 strike is trading at $1.30 right now and the $25 is trading at $.95.

Now, here are the risks: you'll be limiting your upside potential if Groupon has a great earnings call, (which we don't think is that likely at this point, so close to IPO). It's all about guidance at this point - if they guide way up, shares could take off. If they guide down shares could take a big hit. You also don't have that much downside protection if the floor falls out from under GRPN, although you should be able to set up a stop limit order.

I personally bought 500 shares and sold 5 of the $24 strikes at $1.30 for an "instant" profit of $650. That's a gain of 5% on selling call options that are going to expire a week out! So my downside break-even point is $22.31 and upside potential is $24 plus the Option Premium of $1.30, totalling $25.30.

If GRPN shares don't close above $24 by the time the options expire next Friday, I will probably just sell 5 more covered calls. It's a great way to generate income in your portfolio.

Debit Spreads Are Better

Submitted by Anonymous on Thu, 02/09/2012 - 10:16.

Why waste time holding the equity when you could have commited less capital with a deep in-the-money call option which holds very little time value? This debit spread is more efficient than owning the shares. Personally, I would have just written the calls and puts uncovered and protected myself from a 7.5% move. Works for me every earnings. You would have earned a lot more than your measley 5 per cent profit (minus the current reduction in equity).

Debit Spreads Are Better

Submitted by Anonymous on Thu, 02/09/2012 - 10:15.

So... how'd that Groupon Trade go?

Submitted by Stockmaster2 on Wed, 02/08/2012 - 21:23.

Groupon shares are taking a beating today, after missing consensus estimates of .03 and posting a loss of .02.Shares are now down to $22 in after hours trading, and my breakeven point was $22.30.As it turns out, I didn't realize that the covered calls I sold actually expire this Friday the 10th, not the 17th. Which is good news. The call options I sold will likely expire un-exercised this Friday.We'll see what happens tomorrow - I don't think shares will fall too hard, because their guidance for Q1 was up. Most likely I will just hold onto the shares and continue to write covered calls on them up until the next earnings call, and bank coin along the way.

Paring Losses now...

Submitted by Stockmaster2 on Wed, 02/08/2012 - 21:36.

The play by play continues - shares are now paring losses, only down -5% to about $23.20 now that headlines are starting to point to huge top-line revenue growth. Depending on how the conference call turns out, shares could even post a gain tomorrow.