Groupon Inc (>> Groupon Inc) shares surged more than 20 percent at one point on Monday in a short-covering rally as traders scrambled to close bearish bets ahead of the daily deal company's first-quarter results, due after the closing bell.
The rally occurred as many social media stocks got a lift from Facebook excitement.
The stock jumped $1.84 on Monday to $11.75, with more than 7 million shares traded, more than double the average volume of the last 50 trading days.
"What we are seeing here is some covering by the shorts on speculation that Groupon could report better-than-expected results," said Philip Saunders, equity derivatives strategist at broker-dealer Topeka Capital Markets in New York.
The stock has been a poor investment for buyers since Groupon went public in November 2011, when the IPO was priced at $20 a share. Talk of better-than-expected results has helped the stock on Monday, driving short-sellers to cover their positions.
"This should be the first quarter that they report a profit, on a pro-forma basis," said Jeff Houston, an analyst at Barrington Research. "If that happens, it will be an important milestone for Groupon."
Groupon is expected to earn 1 cent per share in pro-forma first-quarter results, which exclude options expenses, according to Thomson Reuters I/B/E/S.
The stock had fallen as much as 54 percent from the end of the year to Friday, May 11, when it hit its low for the year at $9.63. As of May 11, more than 95 percent of the shares available for shorting were being shorted, according to Data Explorers, a short-selling research firm.
"Traders have basically been betting on this stock going lower since the company reported earnings in February," Saunders said.
Shares of online game company Zynga (>> Zynga Inc) rose 8 percent to $8.08 while shares of professional networking site LinkedIn (>> Linkedin Corporation) gained 1.5 percent to $108.84, which analysts attributed to high hopes for Facebook's initial public offering due at the end of the week.
"Part of the move might be attributed to social media stock enthusiasm ahead of the Facebook IPO," said Enis Taner, global macro editor at RiskReversal.com.
Groupon has lost more than half its market value this year on concern about waning demand for its daily deals and the company's accounting troubles.
Heading into the earnings announcement, Groupon options were pricing in around a 20 percent move for shares in either direction. The pricing was based on the May $11 straddle, offered at $2.20 on Monday.
Traders use prices on the straddle to estimate the option market's view of the potential range of a stock, going into an event like earnings. A long straddle - a combination of a call and a put with the same strike price and expiration date - is not a bet on direction but stock volatility.
Groupon options are very expensive, implying about a 20 percent move in either direction on the earnings report. The stock's calls and puts are almost equally active on Monday, so there is little directional bias, RiskReversal's Taner said.
Traders exchanged 44,000 calls and 41,000 puts on Monday afternoon - 3.6 times the average daily turnover, according to options analytics firm Trade Alert. Among the most active options were the May $15 and $11 strike calls and the June $7 and $9 strike puts.
Although Groupon stock has climbed significantly for the day, the options market attracted both buyers and sellers on its calls and puts, said TD Ameritrade chief derivatives strategist Joe Kinahan.
"The trade in here is very interesting because the stock is also hard to borrow, which may turn more people to the options market if they have to cover their short positions on the stock," Kinahan said.
Traders will sometimes use options on a stock to express a short bias when shares are hard to borrow.
"The results should be in line and guidance should be OK. That's driving the shorts to cover. Most of them have made a bit of money already. They will probably try to get in after the earnings again, mostly to play the lockup expiry," said Sameet Sinha, an analyst at B. Riley & Company.
Groupon's IPO lockup ends June 1, allowing some pre-IPO investors to sell some of their holdings.
(Reporting by Doris Frankel; Additional reporting by Alistair Barr; Editing by Jan Paschal)
By Doris Frankel