Name That Trade: Can I Get a Little YELP Here?

by Dan May 13, 2014 1:27 pm • Commentary

YELP is a stock that we have loved to hate in 2014.  After being up 60% on the year at one point in early March, at one point last week it had been cut in half from that level and now sits down about 20% on the year.  What strikes me is the lame bounce after a 50% peak to trough decline last week. YELP is up about 13% from Wednesday intra-day low, and while that seems like a lot, the stock could not stage a threatening assault of the prior breakdown level ($60), and was unable to breach the dramatic downtrend from the highs.  The one year chart below shows what would be a clear “all clear sign” above both levels, but until then pressing the short with a target of $40 could make sense:

YELP 1yr chart from Bloomberg
YELP 1yr chart from Bloomberg

On Friday we made a mildly bullish case for Pandora (P), largely due to its relative attractiveness as a strategic asset in fact Apple were to buy Beats for the rumored $3.2 billion. Part of my thought process was that Pandora with a  $5 billion market cap vs YELP at $4 billion, trades at half the price to sales multiple. While YELP could clearly be a strategic asset for a desperate cash rich internet company like Yahoo, it would likely be one of the most expensive public acquisitions they ever made, assuming they pay a 30-50% premium.  Take-over risk is always something to keep in mind when playing from the short side, and if tech m&a is going to get silly, then traders are going to want to be nimble and cover all their bases.  

If I were to try to short, I would do so with defined risk.  However, implied volatility in YELP is quite high, even though YELP just reported earnings 2 weeks ago, mainly because 10 day realized volatility in YELP is over 100.  Here is the 2 year chart of 30 day implied vol:

[caption id="attachment_40395" align="alignnone" width="600"]30 day implied volatility in YELP, Courtesy of Bloomberg 30 day implied volatility in YELP, Courtesy of Bloomberg[/caption]

On the past two earnings announcements, implied volatility fell down to near 50 2 weeks after the announcement, but it currently lingers around 65.  As a result, if I were to do a defined risk YELP trade in the coming weeks, I would probably look to leg into a short-dated put spread that would be less premium than going further out in maturity.  The idea would be for only a short-term fade trade on a failed breakout or near resistance.