This Dinner Party for Yelp Inc (YELP) Stock Isn’t Over

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Grabbing for shooting stars is just as scary as catching falling knives, except the fear here is for being too late to the party. Today I will venture into one with relative confidence. Yelp Inc (NYSE:YELP) delivered news Thursday, and this time traders are rewarding it with a huge 20% spike.

YELP Stock -- This Dinner Party for Yelp Inc (YELP) Stock Isn't Over

Wall Street is often fickle; we never know how they perceive news. This time, Yelp management left nothing to chance yesterday. They beat expectations, added a sprinkle of financial engineering garnish and topped off the delicious headline dish with a layer of asset sale and collaboration news with GrubHub Inc (NYSE:GRUB).

The result was a dish too delicious, and traders are feasting on it.


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So is there still room at the table or am I too late? Not late at all, as long as I use Yelp options. There I can reserve a seat at this dinner party as if doing it with the help of a time travel machine.

I like selling puts below value to create income from thin air. In this case I am not so much betting on YELP stock’s value. Since it runs a 400 PE, I am betting that yesterday’s news puts a quasi-value safety net below the stock for a few months. With so much upside potential, traders will consider the recent lows as a solid base that are now supported by management’s alliance and stock buybacks. So there should be fewer hopium bear sellers in the stock.

My thesis here is that Yelp stock will not fall below $26 in the next few months. If it does, then I am willing to own the shares.

YELP Stock Charts

The Bet: Sell the YELP Nov $26 put naked and collect $1 to open. This is a bullish trade that has a rough 75% theoretical chance of success. But if the price falls below my strike, I can accrue losses below $25.

For those who want to avoid the big risk of selling naked puts, they can sell spreads instead. There, the risk is capped to the width of the spread less what I collect to open.

The Alternate Bet: Sell YELP Nov $26/$24 credit put spread. This is also a bullish bet with similar odds and that can deliver around 25% in yield on risk.

In either case, I would be chasing the momentum today but with a reasonable buffer as a cushion for error. This is a more secure way of chasing without risking being late to this party. Consider this a table setup for the after party.

Investing in equities is always risky, so I never bet more than I can afford to lose.

Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/yelp-inc-yelp-stock-party/.

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