The Tale of Two Traders

Traders tell their tales of risk and reward all the time. Of course some only tell you about the reward. It kind of reminds me of that Danny O’Keefe song where he sings “You forget about the losses, you exaggerate the wins.” I’ve got friends just like that. 

In October, two friends of mine placed an identical opening trade in Groupon (GRPN). They sold out-of-the-money November 4 strike Puts at .50 cents looking to generate income. Initially, neither one was too keen on the potential of buying the stock but after GRPN drifted lower post earnings they both left their position open and were eventually assigned with an effective purchase price of 3.50 a share (4 strike – .50 credit). The stock is now trading 4.26 so both are enjoying a winning trade. I know because they told me so. Now that they are proud owners of the stock, they of course love GRPN but here’s why:

1) GRPN already enjoys a high brand awareness which puts them at the top of consumers’ minds when it comes to daily deals.

2) Through last year’s IPO, GRPN still has over a billion dollars in the bank.

3) GRPN is launching a much needed new public relations campaign in early 2013.

4) GRPN is expanding its deals of merchandise and travel to compete with Amazon (AMZN) and internet travel sites.

5) GRPN recognizes the need to bring in top tier leadership in the coming months.

But each trader now has a different plan: 

My one buddy decided he’s just going stay long GRPN stock and move on with other trading opportunities. 

My other friend has set-up a GRPN Covered Combo trade.  Sounds like the purchase of a Chicago Beef and Italian Sausage sandwich covered with tomato sauce/hot peppers but it’s not. It’s really two trades in one. A Covered Call and a Short Put. Here’s what his position looks like:

Covered Combination

 Long 1,000 Shares

 Short 10 Jan 4.5 Calls .40

 Short 10 Jan 4 Puts .40

The Covered Call strategy immediately came to mind for him but with the options so cheap he decided to also sell the Puts to enhance his Covered Call return. He is fully aware of the obligations the sale of these options present. He’s OK with purchasing more shares should the stock slide and assignment occurs on the puts for an effective purchase price of $3.20 (4 strike – .80 credit)  And he’s OK with assignment on the calls should the stock rise with an effective sale price of his shares at $5.30 (4.5 strike + .80 credit) And should his outlook change he knows he can take any part of his position off at anytime.

So far both traders are enjoying “the road” they are on with GRPN. Here’s hoping you are too!