About a week ago we took a look at YELP after some unusual call activity. Someone bought 2500 of the Feb 38 calls to open and that got us looking at the stock from a technical standpoint, and what could happen if the stock continued higher off of what had been consolidation near $35 after a nice rally from lows in early 2016 near $15!
Today the stock is higher after RBC Capital’s Mark Mahaney named YELP his top pick for small-cap longs in 2017:
Yelp’s Brand Recognition Among U.S. Internet Users Has Risen Significantly – From 66% in ’14 to 82% in ’15 to practically 100% in ’16 … Users Increasingly Likely To Use Yelp In The Future – 71% of respondents “Extremely”, “Very”, or “Moderately” likely to use Yelp in the future vs. 63% in 2015 … Yelp’s Usage Has Increased As Well – From 37% of U.S. Internet users in ’14 to 48% in ’15 to 65% in ’16 …
This is one of those cases where it’s impossible to determine why a trader bought a bunch of calls in a stock, but it is useful because it got us looking at the name. As far as the trade idea we detailed on that original post, here it was:
YELP (36.40) Buy the Dec30th/Feb 30th 38 call calendar for 2.00
- Sell 1 Dec30th 38 call at .60
- Buy 1 Feb 38 call for 2.60
With the stock through the 38 strike, this trade is mildly profitable. The trade would be at max profitability on Dec 30th, if the stock were to close at $37.99 with the short strike expiring worthless, leaving just long the Feb at the money call. In the mean time though there is risk to the trade if it were to continue to move higher away from the strike. This morning, the stock touched 40 but was rejected at near term technical resistance.
As for trade management, there are a couple things to consider, patience and hope for a consolidation in and around $38, but ultimately make a decision to roll the Dec30th short call at some point prior to expiration. After such a sharp one day move we think it makes sense to give it a day or so before rolling.