Groupon: Puts Likely To Be Expensive

According to Bloomberg Businessweek, shares of Groupon (GRPN) are exceedingly difficult to borrow. There are few shares available at all, so it’s likely to be an expensive stock to short.

How expensive? Bloomberg Businessweek says that the cost to borrow Groupon shares to short them “is rated a 10 by Data Explorers, the most-expensive level on the New York- based research firm’s scale.”

I don’t know what “rated a 10” means in dollars and cents, but I do recall what LinkedIn (LNKD) shares cost to borrow soon after they began trading. As I noted back in May, CNBC contributor Jon Najarian reported fees of as much as 40 cents per day.

That’s 40 cents. Per share. Per day.

Well that was for an $80 stock, so maybe GRPN shares will only cost 10 cents a day to borrow. That’s still $300 per month to stay short 100 shares of the stock.

Good news and bad news

But I have good news. Options will soon be trading on GRPN, so now you can buy puts and avoid high borrowing costs.

Unfortunately, there’s some bad news. There’s likely to be big huge premium on the puts as compared to the calls.

Back in the first few weeks when LinkedIn options began trading, an at-the-money put cost up to twice as much money as the same strike call.

So could you sell an at-the-money put, buy a call at the same strike – taking in a credit – and then short the stock to make that credit a guaranteed profit? Not likely. You probably would have found the cost of shorting the stock to be too high to make that trade worthwhile.

But that volatility discrepancy did abate after a few weeks – perhaps as more shares became available to borrow.

Here’s a look at the cost of a theoretical at-the-money call and put for LinkedIn expiring in 30 days – as a percentage of the price of the stock – and a chart of the ratio between the two

At first, the puts cost way more than the calls, but as time went on, the puts began trading at less of a premium – possibly as the shares became easier to borrow.

So if you’re planning to short Groupon through puts, keep an eye on those premiums as the puts may become less expensive after a few weeks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.