New Trade $YELP: Put Fly With a Little Yelp From My Friends

by Enis November 12, 2013 11:25 am • Commentary

We posted our thoughts about YELP in our CotD post on Thursday, where we noted its first convincing break of the 50 day moving average in many months:

YELP is another huge momentum winner in 2013, up 242% so far year-to-date.  Any sniff of a selloff this year has encountered a new wave of buyers, and the stock has hardly consolidated over the past 10 months.  The stock really got going in the summer.  However, today’s break lower is the first convincing breach of the 50 day moving average all year:

YELP daily, 50 day ma in pink, Courtesy of Bloomberg

YELP daily, 50 day ma in pink, Courtesy of Bloomberg

Today’s break also has not caused too much long-term technical damage, since the stock has held the important $60 support level so far.  That was the high in August, and has been support ever since the stock broke higher in September.

The stock has shown signs of distribution for a couple months, and today’s move looks more like a dead cat bounce than a renewed uptrend.

YELP is a story of impressive user growth and international penetration in a very short period of time.  The company has been furiously spending on sales and marketing to grow the business, and it has paid off as the review site has reached almost 50 million cumulative reviews.

Like all social media stories, the hope is that the company can eventually leverage the rapidly growing platform into future earnings.  Invest now, reap rewards later.  However, valuation, as with many of these stocks, is a concern.  But in the short-term, the real concern is technical.

With the bounce looking like an attractive entry point on the short side, here’s our trade:

New Trade: Buy YELP ($65.55) Jan 60/50/40 Put Butterfly for 1.75

-Buy 1 Jan 60 Put for 3.65

-Sell 2 Jan 50 Puts at 1.05 each or 2.10 total

-Buy 1 Jan 40 Put for .20

Break-Even on Jan Expiration:

Profits: btwn 58.25 and 41.75 make up to 8.25, max gain of 8.25 at $50

Loses: btwn 58.25 and 60 & btwn 41.75 and 40 lose up to 1.75, ,max loss of 1.75 below 40 and above 60

Trade Rationale:  We have defined a wide range to the downside where this trade is profitable below key support at $60 and above the breakout level back in Aug which happens to coincide with the 200 day moving average.  We chose Jan to give us enough time in case YELP consolidates above $60 for a while.  We are less worried about putting on this type of out-of-the-money structure since we view the odds of a big upside break as low given overhead supply.

This is another structure that we considered, but did not execute:

Alternative Trade Structure: Buy YELP ($65.00) Dec21st / Feb 60 Put Calendar for $3.65

-Sell 1 Dec21st 60 Put at 2.50

-Buy 1 Feb 60 Put for 6.15

Break-Even on Feb Expiration:

This trade does best if the Dec21st 60 put expires worthless, and then of course the stock moves below $60.  In the near term, the trade will likely hold its value as long as YELP does not move much higher between now and Dec expiry.

Trade Rationale:  This structure is more upfront premium, and less potential reward in the near term if YELP moves lower, compared to the fly.  But it’s also lower risk since the Feb 60 put will hold its value much better given that YELP reports earnings in early Feb.  The strategy behind this structure would be to wait for Dec expiry, and then look to turn the calendar into a Feb vertical put spread or potentially a Jan/Feb calendar, and go from there.