The changes at Groupon Inc (NASDAQ: GRPN) appear to be paying off. The departure of founder and CEO Andrew Mason in February marked an emotional low point. The stock has doubled since then, and it is now up nearly 250% from the extreme low in November.
The bottoming bounce from the $2.60 low to the $9.43 yearly high has support at the $6 midpoint of the range.
Looking at the bigger picture, the post-IPO high near $31 to the extreme lows has a recovery target of about $16, about 82% above the current price.
As of this writing, Groupon Inc (NASDAQ:GRPN) is trading around $8.80. If you are comfortable holding on to this inexpensive stock for a potential recovery, then selling put options could allow you to collect income while you wait to get into GRPN at a 14% discount.
Cash-Secured Put Selling Strategy
While the typical investor might use a limit order to buy a stock or ETF at a designated price or lower, the options trader can do one better by selling a cash-secured put.
This strategy has the same mathematical risk profile as a covered call. With put selling, there is an obligation to buy the stock at the strike priceif it is assigned, allowing you to get into the stock at a discount. In fact, the true entry cost basis is even lower with the subtraction of the premium you earned from selling the puts.
And if the stock is not below the strike price at expiration, then the premium received is all profit. In other words, you’re getting paid not to own the stock.
There are two rules traders must follow to be successful at selling put options.
Rule One: Only sell puts on stocks you want to own.
The intention of this strategy is to be assigned the stock as a long-term investment (each option contract represents 100 shares). So make sure you have the funds in your account to buy the stock at the options strike price if a sell-off occurs. Paying in full ensures that no additional money is needed to hold the stock for potentially many months or even years until a price recovery.
Rule Two: Sell either of the front two option expiration months to take advantage of time decay.
Collect premium every month on put sales until you are assigned shares at a cost-reduced basis. Every month that you keep the premium is money subtracted from your entry price.
Recommended Trade Setup: Sell to open Groupon Inc (NASDAQ:GRPN) Aug 8 Puts at $0.40 or better. (This is a volatile stock, so I suggest using a limit order to get the desired price.)
This cash-secured put sale would assign long shares at $7.60 ($8 strike minus $0.40 premium), which is about 14% below Groupon Inc (NASDAQ:GRPN)’s current price, costing you $760 per option sold. If the options expire worthless, you keep the $40 premium, earning a potential 5.3% return in 23 days.
But remember, you should only sell this put if you want to own Groupon Inc (NASDAQ:GRPN) at a discount to the current price. If you are assigned the shares, a September covered call can be sold against the stock to lower your cost basis even further.
If the stock does not fall below the strike price before expiration, then you keep the premium you collected, essentially getting paid not to buy the stock.
For more analysis on Groupon Inc (NASDAQ:GRPN), see the video below (starting at 3:10):
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