**** This Trade Idea on Grubhub (GRUB) was published on August 22nd. ****
Running a restaurant is hard work. Hours are long. Finding quality and reliable help is tough. And margins are thin. Oh, and then you need customers!
Enter Grubhub (GRUB).
Grubhub is an online and mobile food ordering and delivery marketplace.
It’s simple… they connect diners to local restaurants making it easier for the customer to buy and get his food from his favorite restaurants.
What’s not to like about that?
Wall Street loved it. Not at first, actually. But then they really loved it! The stock soared from $18 in 2016 to $150 in late 2018. That’s an incredible run.
Technology at its best… catering to our laziness. Helping restaurants, too?Well, maybe.
GRUB does find them customers, but at what cost?
They charge restaurants 23-33% fees on each order. Yikes!
The obvious question becomes: How are restaurants going to make money (You could hear Grubhub executives in the board room… “Volume, baby, volume!”)
Remember those thin margins we talked about?
In order to keep up with costs, the restaurants need to raise prices. Higher prices usually causes lower demand for any product. And lower demand causes businesses to go poof!
So, restaurants have begun fighting back. Whether it’s new technology solutions that are sprouting up, or running to the politicians screaming, they want to reduce and limit these fees… to 10%.
NYC is Grubhub’s main market. And NYC doesn’t like to see its businesses going out of business. The reason is simple… taxes. Business tax, employee taxes, and everything else a good thriving restaurant industry brings.
On August 14th, the NY Post wrote an article indicating that a NY State agency was proposing this 10% limit.
Yikes, again! That would NOT be good for GRUB’s business model.
GRUB broke $60 the next day. You can see $60 looks like an ominous level.
On August 15th, a buyer of 10,000 GRUB Sep $50 Puts came in to pay up to $1.50. He was methodical. He wasn’t rushing. Just sat there all day and bought small 10 lots.
He sees what we see. If this stock breaks $60, it’s going a lot lower. How much lower?
That gap in April, 2017, becomes the target.
But it’s down so much, can it keep going lower?
I haven’t even begun to tell you about GRUB’s competitor… Uber Eats.
Ya, that Uber. The one that isn’t afraid to lose a “little” money to get in the game. The competition in this industry is fierce.
Now, back to what’s important.
This GRUB September Put buyer has been dead wrong (so far) as the stock recouped the $60 line. Those puts are trading $0.35. It happens.
I like the idea of GRUB puts here.
Listen, I think this stock gets back to $80 (geez, maybe $90) or it gets to $35. The market loves filling in those gaps, doesn’t it?
And I think it’s a flip of a coin. But if it’s tails and the stock continues this awful descent, then we have ourselves a jackpot.
That’s great risk-reward!
We need time here. And we need to see those earnings in late October. Buy the December 20th $50 Puts for $2.50. Target Stock Area is $35 – $40.
GRUB got clobbered on earnings, down 43% overnight. The NY Post writes:
In a 10-page letter to investors late Monday, Grubhub Chief Executive Matt Maloney blamed what he called “promiscuous” diners. In addition to Grubhub and Seamless, they’re getting lured to other services like UberEats and Doordash that have been dangling discounts, he said.
“It’s very hard to trick a consumer to pay more than they want to pay,” Maloney said on a Tuesday earnings call. adding that consumers “are incredibly price sensitive, they understand what they are paying.”
Where did it find a floor?
You guessed it. Right near that gap we pointed out near $35. This idea worked out like a charm. The option was bought at $2.50 and traded to $18.00. That’s a 620% return.
But it wasn’t smooth sailing. The option immediately went up 50% before giving it all back and then some. Entry strategy and risk management played a key role. At OptionsGeek, I teach you the importance of an Options Trading Plan and how you build one. Those lessons would have saved you here.
At this point, you have two options:
- Receive 3-5 trading ideas with great risk reward just like this one.
- Learn exactly how I find these ideas making 150-450% returns.