Yelp Inc (NYSE:YELP) is getting some troubling reviews from investors today. However, whenever you see a dip like Wednesday’s plunge in YELP stock, it’s worth taking a minute to ask whether shares are worth a second look.
Let’s examine the situation around Yelp, and see if we can’t way to play this fallen star.
If you’re an active trader, it’s highly unlikely that YELP stock and its dizzying bearish gap failed to get your attention this morning. Shares of Yelp are currently off by about 20% and among Wall Street’s “trending” lists.
You also might be aware that Yelp’s technical implosion followed a narrower-than-expected loss, but a much more troubling downward revision of its full-year sales outlook.
The undesirable forecast is due to weaker advertising revenue trends. In a nutshell, consumers are collectively shifting away from the YELP platform of reviewing products, services and the like, and increasingly toward social media like Facebook Inc (NASDAQ:FB) and Alphabet Inc’s (NASDAQ:GOOGL) Google for the same fulfillment.
There’s more to it, as bullish and bearish analysts go about the business of defending, reiterating or altogether retracting ratings and price targets. But my outlook is that Yelp stock — despite its already large decline — is still a short.
Yelp Stock Chart
Click to Enlarge
Yelp’s bearish price gap broke a couple significant lines, and as a result, shares are near-term oversold. More importantly, though, bulls attempting to buy a bounce (or less likely technical bottom) are still going to have a hard time.
Yelp had seen bearish pattern, moving average and trendline signals and confirmations pile up for months. And respecting that price action clearly trumps playing with knives as the latest test of fresh Fibonacci support comes into play.
How to Trade YELP Stock
The bears are in obvious control of Yelp. Shares might jiggle higher or pause to diffuse an oversold earnings reaction, but there’s nothing that says oversold conditions can’t beget oversold conditions.
Given the technical situation and liquidity restraints in Yelp’s options, I like the idea of approaching YELP stock bearishly with a limited-risk, cost-efficient bear put spread.
With Yelp around $28.15, I suggest the weekly 2 June $27/$25 put vertical at 35 cents.
What does this spread offer bearish traders? For one, if YELP stock fails to move below $27 by expiration, this position will forfeit the entire debit of 35 cents. At the end of the day, however, that’s very modest risk in a super-volatile stock that could have the bears screaming, too.
Secondly, and more optimistically (if you’re a bear), if Yelp shares drop below today’s first-half low of $26.93, the spread is already moving in the money. At that time, profits will be accruing or at least offer the building of actual intrinsic value, depending on how quickly a resumption of the downtrend happens.
Lastly, below $25 and about 2% beneath the 62% retracement level, this vertical expands to $2 at expiration. That amounts to a profit of $1.65, or a return of more than 470% for an additional decline of less than 11%.
All things considered, that’s a four-star play.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
