That opportunity will not come this trip. GRPN closed above its 10-day price channel on Thursday and confirmed the breakout today. I have removed GRPN from the Roll List and calculated the results.
GRPN shares declined by 4.3% over the bear position's 33-day lifespan, for an annualized decline of 47%.
The options produced a 26.3% yield on risk, or 290.7% annualized.
Under my rules, GRPN must again break below its 20-day price channel before it is eligible for another bear play.
Update 10/9/2013: GRPN opened in pre-market trading at $10.60, dropped sharply in the first 25 minutes after the opening bell, and never came within a dime of the open the rest of the day. It began executing a symmetrical triangle on the five-minute chart with about two hours left to trade, breaking down from the sideways pattern 25 minutes before the closing bell.
That break from the triangle provided the very near term downward momentum I needed to make a decision. I opened a bear position 10 minutes before the closing bell, structuring it as bear call spreads expiring in November.
The position provides small leverage, only 1.5:1, which is not surprising for contracts on such a low priced stock. The maximum potential yield at expiration is 28.2%. The spreads provide an 8.5% hedge of profitability above the entry price.
Groupon Inc. (GRPN) began trading with an initial public offering on Nov. 4, 2011, opening at $28 per share. It rose that day to $31.14 and then did the traditional IPO dive down to $2.60 on Nov. 13, 2012. It is that point that I consider the beginning of the "real" GRPN chart, the starting point of my analysis.
GRPN broke below its 20-day price channel on Tuesday and confirmed the bear signal today by trading sharply lower.
The chart shows GRPN to still be in an uptrend from the $2.60 low in 2012. Using Elliott wave analysis, I count waves 1 and 3 to the upside, separated by a sideways wave 2 correction. That count makes the present decline a zig-zag wave 4 correction, to be followed by a wave 5 that will rise above $12.76.
|GRPN 1 year daily bars|
Fourth waves generally end above the preceding fourth wave of the lower level trend. Wave iv ended at $9.27, and so wave 4, by Elliott wave doctrine, should reverse above that price as wave 5 begins.
The sharp break of wave 4 below the trend channel is enough to cast the entire count in doubt. That characteristic makes the movement look more like the beginning of a downtrend correction of the rise from $2.60.
However, I can't in good conscience construct a count in the rise to the $12.76 peak that would label it as the end of wave 5, so I'm stuck with the contradiction and the ambiguity and, frankly, the quirkiness that often characterizes charts of individual stocks.
In any case, the end of wave iv is more than 7% below the present price, so that gives significant room for downside profit whatever the labeling might be.
GRPN's historical record of bear breakouts is of little help in making a trading decision. This is the first bear signal since the $12.76 peak on Sept. 9, which is not surprising since that was only a month ago.
There have been two bear signals since the rise began from $2.60 in November 2012. Neither was successful, producing an average loss of 21.2% over 13 days. But that was in an uptrend, and we may still be uptrending.
Strangely, the odds of a successful bull signal during the uptrend have been poor. Out of six completed bull signals, five were failures for an average loss of 5% over 22 days. The one winner earned 9.5% over 36 days.
GRPN was one of eight signals to survive my initial screening last night and was the most liquid of the group. (See "Wednesday's Prospects".)
Six fell by the wayside during the second wave analysis today, leaving only TCK as a possible alternative to GRPN. I decided to do a detailed analysis of GRPN because of its greater liquidity, always an important consideration in bear trades.
Groupon, headquartered in Chicago, Illinois, is one of the new online personal marketing companies. Merchants offer discounts through Groupon, which emails coupons to its subscribers. Groupon and the merchant split the proceeds from resulting sales.
Analysts collectively put out negative vibes about Groupon, coming down with a -43% lack of enthusiasm rating.
And no wonder. The company reports a negative 12% return on equity. It has lost money in two of the seven quarterly earnings reports since going public, the mot recent loss being in the 4th quarter of 2012. It recovered the next quarter for a gain but then saw profits decline in the next and most recent quarter. It still earned money, but less than in the prior quarter and far less than in the year-ago quarter.
Groupon has surprised to the upside five times. The two downside surprises came in the losing quarters.
Institutions own 66% of shares, which retain a high value relative to sales. It takes $2.90 in shares to control a dollar in sales. Clearly, traders are pricing in a lot of expectations for the future of the new company that aren't shared by analysts.
GRPN on average trades 21.3 million shares a day and supports a moderate selection of option strike prices with open interest running to four and five figures. The bid/ask spread on front-month at-the-money puts is 1.9%.
Implied volatility stands at 84% (not a typo) which is just above the midpoint of the six-month range. The peak in that period was 98% back in May. It has been rising steadily from 52% in mid-September, near the low point of the range.
Options are pricing in confidence that 68.2% of trades will fall between $7.50 and $12.32 over the next month, for a potential gain or loss of 24.3%, and between $8.75 and $11.07 over the next week.
Contracts today are trading heavily with steep skewing toward the puts, which are running at nearly eight times the five-day average volume. Calls are running at nearly 2-1/2 times average volume.
Groupon next publishes earnings on Nov. 7.
Decision for my account: OK. The chart lacks clarity. The odds lack data. But GRPN is clearly in a near term downtrend that is supported by the state of the financials.
If downside momentum persists into the last half hour before the closing bell, I intend to open a bear position in GRPN, structuring it as a bear call spread, which allows me leverage but also the ability to hedge.
I'll update this analysis with details of the trade if it occurs.
If momentum reverses or falters, then I'll put GRPN on the shelf for consideration if it again breaks below the price channel.
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.