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This morning I am recommending a bullish trade on Yelp Inc. (NYSE:YELP), the owner of the online review site of the same name.
YELP is struggling after announcing it missed revenue expectations for the third quarter. The stock has fallen more than 30%, and the company lowered its fourth quarter revenue guidance as well.
From a fundamental perspective, this isn’t a stock I would want to own for the long term.
However, the recent decline also means that call option prices have gotten cheaper. With that in mind, I’m looking at a trade with a low cost and big upside potential. That low initial cost also means traders would be taking on relatively low risk.
While the fundamentals are weak, the technical picture is a little more hopeful.
As mentioned, the stock gapped down by 30% after its disappointing earnings report, but the stock was able to hold at long-term support.
As you can see in the weekly chart of YELP below, shares have stabilized at about $31.50 after briefly crossing below that level on the earnings overreaction.
That same level served as resistance back in 2013 and 2015, and it is now acting as support.
Furthermore, looking at the Relative Strength Index (RSI) indicator on the bottom of the chart above, we can see that YELP is fairly oversold on a weekly basis.
RSI is a technical indicator that measures the average losses compared to gains over the last 14 trading days.
While this indicator has only just started to turn higher again, the last few times the stock was this oversold, it resulted in huge rallies.
For example, after the weekly RSI fell below 35 in May of 2017, YELP rallied by more than 75% over the next six months.
In my view, there is a good chance that YELP recovers from current levels, and I think we have a good opportunity to profit from the following low-cost bullish trade.
Using a spread order, buy to open the YELP Dec. 7th $36 call and sell to open the YELP Dec. 7th $38 call for a net debit of about $0.40.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
This is a long-shot trade, so take a small position.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
