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Crowd-sourced review app Yelp (YELP) recently made Barchart’s screener for unusual stock options volume but for all the wrong reasons. Releasing a stinker of a sales guidance will do that to you. Still, if you’re an extreme believer in the buy low, sell high philosophy, then YELP stock call options could be an intriguing proposition. We’ll get into the options roadmap to help you navigate the mess.
First, let’s discuss a bit the turmoil that occurred. Last Friday, YELP stock pinged as one of the most aberrant trades in the derivatives market. Specifically, total volume reached 11,204 contracts against an open interest reading of 18,425 contracts. Further, the difference between Friday’s volume and the trailing one-month average metric came out to 1,235.4%.
Unsurprisingly, put volume outnumbered calls – 7,756 contracts versus 3,448 contracts. This pairing yielded a put/call volume ratio of 2.25. To be sure, investors need to be careful about overinterpreting the ratio. After all, buying put options can represent a form of insurance against volatility. However, the fundamental context implies strongly that traders were betting against YELP stock.
According to Barchart content partner The Motley Fool, Yelp’s fourth-quarter earnings results were mostly in line with analyst expectations. Revenue increased by 11% to $342.4 million, edging out the consensus target of $341.3 million. However, the real fireworks – the bad kind – centered on the outlook for 2024.
Management now expects both revenue and profit growth to decelerate this year. On the sales side, its forward projections call for $1.42 billion to $1.42 billion. While up 7% from 2023, it’s worse than the consensus view of $1.46 billion. Also, EBITDA may land between $315 million and $335 million, the midpoint of which is slightly below the $330 million it reported in 2023, per TMF.
Subsequently, YELP stock dropped more than 14% of market value on Feb. 16. For the year, shares are down 18%.
Buying the Ugliness in YELP Stock
Of course, with the American consumer suffering from years of high inflation and high borrowing costs, the health of the discretionary component of the economy is suspect. Likely, at least part of the reason why YELP stock suffered so much was that investors finally saw the theoretical realm becoming actualized.
At the same time, one of the fundamental benefits of YELP stock is that it covers a wide range of businesses. If the underlying platform was only useful for the purchase of big-ticket items, I’d be extremely worried. But we’re also talking about dynamics such as which restaurant serves the best food for the lowest price.
In other words, we’re dealing with components of the discretionary space that doesn’t require intense cash outlays. As a result, the robust jobs reports should help support YELP stock, especially at these arguably discounted levels.
If you believe in the contrarian upside possibility of Yelp, here’s your options roadmap (populated through Barchart’s unusual options activity screener):
For those looking for a nearer-expiry balanced call option, I’d look at the YELP Jun 21 ’24 35.00 Call. As of last Friday’s close (which of course is subject to change), the premium of this contract is $5.20. Further, the spread for this option is 5.83%.
According to the average analysts’ price projections broken down linearly, YELP stock may be worth $41.40 by the June expiration. Assuming no time value remaining and just playing for intrinsic value, the cost of exercising the June call will come out to $4,020. However, the value of 100 shares of YELP would be $4,140, providing a profit of $120.
That’s not a lot. However, we’re assuming that if the analysts’ price projections pan out and you’re left with only intrinsic value, you can walk away with $120.
For further out the expiration date spectrum, I’d look at the Jan 17 ’25 40.00 Call. It’s out the money (OTM) at the moment but the spread is reasonable at 8.16%. Further, if the consensus target holds true, YELP stock could be worth $47.32. Assuming no time value and an exercising of the January call, you’re left with a cost of $4,485. However, 100 shares of YELP stock by then should be worth $4,732.
If the high-side target turns out to be accurate, you’d be looking at a position value of $5,359. Factor in the possibility of YELP stock moving northward quicker than projected and this call could be quite lucrative.
Risks to Consider
To be 100% clear, any market projection – whether about the open market or the options arena – makes certain assumptions. In the case of my options roadmap, I’m assuming that the average analysts’ target comes true, with the hope that the most optimistic target ultimately wins out.
However, analysts are humans and humans are prone to error. So, you never want to get too comfortable with any options-related strategies. At minimum, you should consider the downside risk. With YELP stock, the most pessimistic analyst projects that shares will hold at around $38.
So, the risk analysis is simple. For the January call, the total contract cost assuming exercise comes out to $4,485. If the low-side target actually materializes, 100 shares of YELP stock would be worth $3,800. So your loss would be $685 per contract exercised.
In this case, though, you might just eat the total premium of $485 ($4.85 multiplied by 100 shares). And be aware that YELP stock could easily fall below $38. Therefore, you must factor in the pros and cons before pulling the trigger.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
