Bears Are YELP-ing in Pain

by Tyler Craig | October 5, 2012 8:43 am

Since its IPO in early 2012, Yelp (NYSE:YELP[1]) has spent the year caught in a game of ping-pong between $17.50 and $27.50. While trading ranges might provide profits for the nimblest of traders, they typically frustrate the majority. The absence of follow-through leaves little meat on the bone for traders used to riding multi-month trends.

YELPchart 300x185 Bears Are YELP ing in Pain
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Fortunately, it appears the social networking stock might be turning a corner. With the recent breach of $27.50, Yelp might finally be departing its trading range of old in search of higher prices.

Consider what YELP has going for it as it reaches new all-time highs. It means every investor owning shares is sitting with a profitable position. The absence of pain for existing shareholders results in a lack of overhead supply. In other words, no one is waiting to get back to even so they can sell.

On the other hand, consider the plight of the poor short seller. With YELP at all-time highs, every single one of them is underwater. As their pain increases, they become increasingly likely to panic out by buying shares to cover their positions, thereby adding fuel to the current bull run.

Option addicts will be happy to know YELP options have enough activity to keep the bid-ask spreads in an acceptable range.

Traders looking for bullish exposure during the next six weeks might consider purchasing a November 28-31 bull call spread. To initiate the position, you would buy the Nov 28 call while selling the Nov 31 call for a net debit of $1.25 or better.

The max risk is limited to the initial $1.25 debit paid and will be incurred if YELP sits below $28 at Nov expiration. The max reward is limited to the distance between strikes minus the net debit, or $1.75. To capture the entire $1.75, YELP would need to be trading above $31 at Nov expiration.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. YELP:

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