Long Groupon

Yup I said it. To my knowledge, I am the only person out there who has said it - the coverage of GRPN in the blogosphere is universally bearish.

Not only that, but all of the available supply of securities have been sold short at very high lease rates (here - technically in order to go short you have to locate someone who is long and pay them an annual return for the privilege of shorting their stock).

Additionally, I hate this stock. They are spending way too much to add customers, their business model is easily replicable (which means that margins will inevitably shrink), and their valuation bakes in growth rates which I consider an impossibility.

So how do I end up recommending a long position? For one, assuming that no other investors are willing to lend out their shares, there will be no more selling pressure from the shorts (as well as a non-negligible risk of a short squeeze). Two, I don't think there will be immediate clarity on the strength of the bearish arguments - it will take a couple of quarters of reporting for the market to reach a consensus. In this period, I expect significant volatility in the stock's price.

Finally, the nature of my long position is important. I purchased a very small amount (1% of capital) of July 2012 $30 calls this Monday for $1.10 apiece (mid-price is currently $1.70). The skew in pricing between puts and calls was pretty outrageous - at the time similarly out-of-the-money puts were trading for about 4.5X the price, tilting the odds in my favour. This position exposes me to asymmetric payoffs: a small loss if the stock falls (the most likely scenario) and a large profit if the stock defies gravity and rises.

In sum, my thinking here is that this stock will experience considerable volatility over the next few months (look at LinkedIn's price history for a guide). As a result, there is a considerable probability that Groupon could appreciate from here. Even if this move is only short-lived, my options will move in a similar direction. Timing the exit from this trade will be difficult, and there is a considerable probability that I end up holding the options as they expire worthless. However, due to the asymmetrical payoffs of this trade, I consider this a positive expected value situation.

Disclosure: I am long July 2012 $30 calls. I also went short AMZN via Jan 2012 $200 put options after they failed the retest of resistance at $220 yesterday - see previous post here.