Last week I was looking for another stock that I wouldn’t mind owning, that was low cost (less than $10 a share) and that had a put premium of more than 2%. I found Groupon. The stock has declined tremendously since it’s IPO but I thought it had gone down far enough. Of course it wasn’t at zero so it could still go down a little more. The price was around $5.90 a share on the day I made the trade. It was an up day for the stock closing near $6.00. I thought to myself, I wouldn’t mind owning some Groupon stock so I sold a put for 38 cents a share.
Pretty cool I thought. I just made $38 and I don’t even own the stock. I used the $5.50 strike price with the March expiration. It was only 3 weeks away, what could go 
wrong? It was over a 6% return on the possible $550 purchase I would make. And then the earnings report came out and the stock tanked. It closed the night before at $5.98 and opened the next morning at $4.25. All of the sudden I didn’t think I was getting such a good deal so I decided to do a quick analysis of a couple of options. The first option was to let it ride. Yeah sounds like gambling, and sometimes it feels like it too. The idea here was that possibly the market was overreacting and the stock would rebound from the gap down in the price. After all, I have 3 weeks until the option expires. The other option I was looking at was to assume the price would stay around 4.50, where it was when I was looking into this option. In this case I considered buying the put back, which would result in a net loss, buying the stock directly to save a few bucks on the option exercise and then immediately selling a call. It was probably more work than it was worth doing on a stock worth less than $5.
The end result at the time was that if I decided to buy back the option, buy the stock and then immediately sell a call the result would be that the net cost of owning the stock would have been around $5 to $10 cheaper than if I just let the stock get put to me at expiration. Of course, this is assuming that the price stayed around $4.5o from Feb 28 to the March expiration. Needless to say, after the quick analysis $5 wasn’t enough incentive to go through the process for me. I kept the put and decided to see if the stock recovered. As of yesterday’s close the stock was at $5.42, not bad. There is still about 2 weeks until expiration but if it stays around this price I wouldn’t mind getting the stock if the put were exercised. After all my net cost would be $5.5o less the $38 premium I collected for a net cost of $5.12 per share. I could then start to sell calls and collect more premiums. One thing I did learn though is that you might want to wait until after the earnings announcement before selling a put if you want to avoid some of the volatility.
I didn’t learn that lesson fast enough as I also sold a $12 put on Pandora (P) with the same expiration. I did collect a 90 cent premium and the stock was at $12.80 at the time so we’ll see how it goes. Pandora reports in the next couple of days. On the other hand, Groupon’s CEO tendered his resignation which seemed to give hope to investors of that the company could turn around and improve the price. Only time will tell and I only have about 2 weeks.