Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.
J-Hooking the Unusual Options Volume in Groupon (GRPN)
It’s safe to say that in most any other framework, discount facilitation service Groupon (GRPN) would be considered an extremely speculative idea. With the advent of social media, companies have more avenues to directly communicate with their customers. Therefore, the business model has gradually faded away, leading to a significant drop in demand for GRPN stock.
Sure, one can make the argument that since the beginning of the year, the embattled company gained almost 37% of equity value. Also, in the trailing 52 weeks, GRPN stock shot up just under 141%. However, the broader context is key. In the past five years, shares tumbled 76%. And since the public market debut, the enterprise cratered to the tune of nearly 97%.
However, the market is the ultimate arbiter. Yes, the fundamentals eventually matter and they present a rough case for GRPN stock. Nevertheless, people want what they want. And if enough investors bid up a particular company, it doesn’t really matter how beleaguered it is – it will probably swing higher. This leads us to a technical analysis tool called the J-Hook Pattern.
Found under the list of Barchart Screeners, the J-Hook is a “step-up” pattern that features four distinct movements or cycles prior to a potential breakout move. I provided a visual explanation in an article I wrote focusing on Barrick Gold (GOLD).
Basically, it’s an up-down, up-down action that Barchart identifies using a set of nine criteria. You the trader will then decide whether the fifth action will be in the positive direction or not. That segues into the derivatives play for GRPN stock.
Unusual Options Activity Puts a Compelling Spotlight on GRPN Stock
Following the close of the July 12 session, GRPN stock ranked among the highlights in Barchart’s screener for unusual stock options volume. This data interface focuses on what the smart money may be doing with its funds. It’s not a guarantee of anything but it provides retail investors with some clues regarding professional market sentiment.
On Friday, total volume hit 34,678 contracts against an open interest reading of 115,010. The difference between the July 12 volume count and the trailing one-month average metric came out to 374.91%. Further, call volume exceeded put volume but by a rather small margin – 18,939 contracts versus 15,739 contracts.
On paper, that might appear bullish as more traders are targeting call options than puts. However, Barchart’s options flow screener – which filters exclusively for big block transactions likely placed by institutional investors – shows that net trade sentiment for the Friday session landed at $67,400 below breakeven. Essentially, a mixture of sold calls and bought puts contributed to the negative tilt.
There are two things to consider though. First, options flow sentiment can differ from day to day. For example, on the June 25 session, the biggest option premium for that day came out to $125,000, with traders buying the Nov. 15 ’24 $20.00 Call.
Second, sold calls don’t necessarily mean that traders are betting against the underlying equity. In the case of GRPN stock, it has already spiked up 12% in the past five sessions. So, stakeholders may want to collect some income off the options’ premium rather than just holding the security passively.
Ultimately, with GRPN stock being a speculative and underappreciated play, it doesn’t get as much airtime as other publicly traded entities. So, that traders are bidding on the underlying derivatives – whether for net bullish or bearish reason – may be contextually interpreted as an overall positive.
Short Interest: The Other Enticing Variable
Besides the J-Hook signal and the spike in unusual options activity, the other enticing variable in Groupon stock is its short interest. It’s quite high, standing at 23.06% of its float. In addition, the short interest ratio lands at just over four trading sessions. That’s the time it would take bearish speculators to unwind their short exposure.
However, the risk to a bearish position, of course, is that the underlying security continues to rise in value. Short trades attempt to exploit the difference between the sale price of the borrowed securities versus the subsequent buyback price. If the latter is lower than the former, the traders collect a profit. However, if the opposite is true, the traders incur a loss.
Those losses are uncapped because there’s no upside ceiling to how high a security can go. Therefore, with Groupon stock printing a J-Hook combined with heightened trading activity in the options market, a very real possibility exists of upside, perhaps even significant upside.
Whether you’re interested in Groupon or not, you’re going to want to pay attention to GRPN.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
