Traders who saw Twitter Inc. shares soar after reporting results last week are adding to bets that Groupon Inc. is next.
Contracts that pay should shares rally 10 percent are priced near the highest level ever relative to bearish contracts, according to data compiled by Bloomberg. About 97,000 calls on Groupon changed hands yesterday, the most since February. Trading in the options market suggests the shares may rise or fall 21 percent when the company reports results today.
With short sellers pushing bearish bets to the highest in four months, it won’t take much to spur a rally in the shares, according to Sameet Sinha, a senior research analyst at B. Riley & Co. Groupon has plunged 40 percent this year as investors questioned whether it can be profitable in running a daily deals website for shoppers.
“The short interest is very high, sentiment is very negative, so a little bit of good news, a good quarter, good guidance, could send Groupon stock up,” Sinha said in a phone interview from Los Angeles on July 31. “Whether that’s going to be sustainable, that’s going to depend on performance going forward.”
Internet stocks from Twitter to Facebook Inc. and LinkedIn Corp. have rallied more than 5 percent the day after reporting their latest quarterly results on signs the companies are generating more cash from mobile advertising and attracting bigger audiences. On July 30, Twitter shares had the biggest gain since the day following its initial public offering after saying World Cup-related demand helped it double revenue.
Groupon, which sells deals on everything from laser hair removal to restaurants and vacation getaways, is scheduled to report quarterly results after the close today. It probably earned less than 1 cent a share during the second quarter, down from 2 cents the previous year, according to the average estimate of analysts in a Bloomberg survey.
The company, known for providing once-a-day e-mailed deals, has struggled to transform itself into a broader discount-offer service that can compete with marketplaces like Amazon.com Inc. Only five companies in the Russell 1000 Index have fallen more than Groupon this year.
Traders are speculating on a big move after earnings and some short sellers are probably buying calls to hedge against a rally, according to Fred Ruffy, a senior options strategist at Trade Alert LLC in Chicago. About 9 percent of Groupon’s shares outstanding have been borrowed and sold to bet on future losses, the most since April, data compiled from Markit Ltd. show.
“It’s been a pretty big earnings mover,” Ruffy said in a phone interview on July 31. “If there’s a 20 percent move and you’re short Groupon you’re hurting, but if you’ve got some calls, you’ve got some insurance.”
Groupon rallied 8.7 percent to $7.02 yesterday, the most since November. Shares fell 1.9 percent to $6.89 at 9:59 a.m. in New York.
Among calls with a strike price of $7, the ones expiring this week had the highest trading volume. The overall trading in the contracts suggests some investors see sustained gains in the stock, Andrew Wilkinson, chief market analyst at Interactive Brokers LLC, wrote in a note yesterday.
Bill Roberts, a spokesman for Chicago-based Groupon, declined to comment on the stock.
Calls with an exercise price 10 percent above the stock cost 0.82 point less than puts betting on a 10 percent decline yesterday, according to three-month data compiled by Bloomberg. On July 25, the spread was negative 1.5, indicating greater demand for bullish bets.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, gained 2.7 percent to 15.52.
There are doubts that customers will go to Groupon’s website searching for deals, instead of waiting for daily coupons to arrive in their inbox, said Thomas White, a research analyst for Macquarie Capital USA Inc. in New York. About 9 percent of website visitors from North America used the search tool, Groupon said in May.
“Earnings expectations are pretty low,” White said in an Aug. 1 phone interview. “On the key issue of whether or when consumers are going to catch on, we have very limited visibility and limited conviction, which is why we’re not more constructive.”
Groupon fell more than 20 percent following its two prior earnings reports. The stock trades at 45 times estimated earnings for the next four quarters, double the valuation for companies in the Nasdaq Composite Index, data compiled by Bloomberg show.
Executives have set goals to reignite growth and introduced new technology to help sales, according to B. Riley’s Sinha, who raised his rating on the stock last month to buy from neutral. In May, the company introduced a service that lets merchants identify customers with its coupons and enable them to pay for purchases using Apple Inc.’s iPad mini.
“When they went public, internal operations were in disarray,” Sinha said. “It’s becoming a lot more formal, a much more thought out and a much more methodical approach.”