Investors aren’t making overly anxious noises just yet, but a sell recommendation on Yelp Inc (NYSE:YELP) points to plenty of agitation ahead. But if you’re not buying what they’re selling, one highly liked idea for investors is a bull call spread in lieu of buying YELP stock. Let me explain.
Aegis Capital came out on Tuesday with a downgrade from hold to sell on Yelp shares. The firm also dropped its price target from $45 to $34 which established a new low bar for 12-month return expectations. Unsurprisingly investors acted how one might expect given the uncommon and overtly bearish recommendation, sending YELP stock lower by almost 4%.
What was behind the ratings change? Aegis cited YELP’s new business model away from a 12-month contract to non-term agreements which will require increased spending to obtain new customers on top of a drop in average revenue per user.
But, other analysts are confident Aegis has it all wrong. On CNBC Tuesday, YELP was defended based on the company’s ability to now tap into a larger well of customers, having positive cash flow, growing margins, a low market cap of around $3.5 billion and successfully monetizing its spending.
Confused? You’re not alone. But if I were to pick a side, I’d go with the bull case here. Let’s take a look at the YELP stock price chart too.
YELP Stock Weekly Chart
Looking at the weekly chart of YELP stock and the inclination also favors holding a more optimistic outlook. Shares in recent months have established a double top pattern. That’s bearish. But the other reality and one with a bit more weight in our estimation; is YELP is still trading within a decent-looking up-channel.
Now and as shares approach channel support with the backing of an oversold stochastics set up, conditions look promising for bulls willing to get long in anticipation of a rebound in YELP stock and reaffirmation of its uptrend.
YELP Stock Bull Call Spread Strategy
After reviewing YELP’s options, one favored bullish strategy as shares move towards chart support is a bull call spread. Specifically and with shares at $41.05, the Aug $44/$48 call vertical for $1 looks attractive.
This is a very sensible position which vastly reduces long premium risk and cuts the trader’s absolute downside exposure to just over 2% of holding YELP stock. The strike placement lines up nicely with clearing a chunk of resistance within the bullish channel, while respecting, to a certain extent, the double-top as the vertical is short the $48 strike call.
The August contract also holds an earnings catalyst to potentially launch shares higher. If however the event fails to produce the desired price action, the roughly 2% spent on the vertical could be viewed as money very well spent in a defensive sort of way.
Lastly and for bulls so inclined to buy on weakness, if YELP stock moves a bit closer to a full-fledged and successful test of chart support, selling a bull put spread could radically improve the trader’s chance for a profit. One caveat is adjusting into a modified fence combination would increase the trader’s downside exposure. And that of course, needs to be accepted ahead of time in order to prevent unprepared yelps of pain from larger-than-expected losses.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
