Strategy to ride premium down on GRPN puts

Discussion in 'Options' started by jmhunter, Nov 15, 2011.

  1. jmhunter


    Ok, so I think GRPN is going down like anyone... So the obvious move is short stock... but thats too expensive right now... So their options went up today, but the premium is WAY HIGH.. obviously the premium is going to go down, but the price will also likely slide... The ATM put is 3 bucks!!! Thats redic high for a 24 buck stock... So whats a good strategy to take advantage of the dwindling premium while also taking advantage of the sliding price? I'm thinking a long front month high strike put, short a back month.
  2. jmhunter


    You know I just read about that today... Good call! I just saw an opportunity with this high premium.. anyway to take advantage of it while protecting from the falling price?
  3. If a short stock position is acceptable, another possibility is selling ITM naked calls to capitalize on loss of intrinsic value. One problem with this is that if the borrow/carry cost is high, the time premium for deep ITM calls is likely to be low and early assignment can be a problem (high carry rate or forced cover of short shares).

    Your wrote long front month high strike put, short a back month. I'm assuming same strike. Unless you expect a serious decline in IV, a reverse calendar isn't going to be as profitable as you think. The break evens will be fairly wide.

    These tend to work better closer to expiration when near moint is quite cheap and imminent news is expected (say earnings).
  4. is this trade too obvious...sell a spread like SELL DEC 25 C/BUY DEC 27 C
  5. edfor


    Calls are less than half the premium of puts right now. You can sell a July $24 put for 8.20 and buy a July $24 call for 3.20. That's a net credit of 20% of the stock value and you get all the upside you would get if you owned the stock. That's messed up.

    If you also short a July $15 call you get 9.00 more net credit, total of 14. The stock would have to drop to under 10 for you to lose money, and you would make 14/share if it goes up at all.

    Either the options are being priced terribly or the market is convinced this is going to zero.
  6. FSU


    The main reason for this pricing is the stock is impossible to borrow. That is why the puts are so much higher than the calls.

    For anyone considering a play here, the WORST play is long the stock short calls. If you want this risk profile, short the puts instead.
  7. edfor


    So what happens if you short a call and for some reason get assigned early when the stock can't be borrowed? Can't they just buy you in at whatever the going rate is and you don't really lose anything?
  8. Yes. But you will be failing to deliver at the same time the whole street is. They will buy you in, but it will be at a price that's like 100% higher than now.
  9. edfor


    Maybe, but you would have to get assigned or liquidated in the middle of a short squeeze to be hurt. I can't really see either being that dangerous, especially if you have a long call at a much higher strike. You could buy a 35 call for pennies to cover the chance of an epic short squeeze.
    #10     Nov 15, 2011