Groupon (GRPN) is set to announce their IPO price after the close tonight, and trading in the shares should begin tomorrow. GRPN shares were indicated at $16 to $18 per share. We have read stories about the demand for these shares possibly pushing the IPO price price as high as $21 per share.
As often happens with IPO’s on much talked-about stocks, we’ve received a few calls this week in The Options Institute about trading GRPN options. Some may be thinking they will be shut out on the stock allocation and want to buy call options. Others might feel the IPO is priced too high and want to use put options as a bearish play. Others could have a neutral opinion – some of those shut out of the IPO might be bid below the IPO price and some who got long the shares might be willing sellers if the shares move higher after the IPO.
There are a few items that you should be aware of concerning GRPN options.
First, options are not listed the same day the stock begins to trade. GRPN would be eligible for options trading on Monday, November 14th, certifying with the OCC on Friday, November 11th. Prior to certification, we would still need to confirm the shareholder requirement and a few other required items.
Will the CBOE list options on GRPN? With the interest generated by the IPO, I’d think so. If all goes as scheduled, Citadel will be the Designated Primary Market-maker at The CBOE and Group 1 will be the Lead Market-maker on our floor for GRPN.
GRPN Implied Volatility? I’d think it would be fairly high, but that’s just a guess.
Will there be anything unusual about GRPN option pricing? Perhaps. There is a relationship between call and put prices known as Call/Put Parity (look up two strategies, one is the “Long Conversion”, the other the “Reverse Conversion” or Reversal. In most situations there is a relationship between call and put prices).
In GRPN’s case, it has been reported that less than 5% of GRPN’s shares will be in float. That’s about as small a number as I recall hearing.
Here’s an example of the Reverse Conversion. In a “normal” stock at $20 (XYZ), you send in an order to buy 10 of the 60-day, 20 strike XYZ puts. A market maker sells you those 10 puts, shorts 1,000 shares of XYZ at $20 and buys 10 XYZ 20-strike, 60-day calls. Stock goes down, he’s short the puts but short shares. Stock goes higher he’s short stock but long call options. He or she is trying to pick up a few pennies on this trade. Almost all the time, there should be a relationship between the put price and call price.
On a stock that is difficult to borrow, there is “no relationship” between puts and calls. If you want to buy puts, the market-maker might want to sell and deliver shares to hedge themselves – and there aren’t any shares available! How do they price their put options? With a much higher volatility. Bearish speculators wanting to short shares can’t find them, they might look to put options as well.
Knowing that, if bearish how could one employ a bearish put option position and reduce the “hard to borrow” factor ? Consider the purchase of a Bearish Put Vertical Spread. How could a market-maker selling this to you hedge themselves without trading stock? By selling a Bullish Call Vertical Spread. This is known as a “Box” – a five point call spread and and five point put spread with the same strike prices and same expiration is worth five points at expiration, no matter where the underlying goes.
Back to GRPN. Earliest date it will trade is Monday November 14th. With such a small float, don’t be surprised if put options trade at a higher price than call options – it doesn’t point to the shares going higher or lower, it’s just how option pricing works. Look up the “Reversal”, it tells you a lot about option pricing. Trade carefully.