Ahead of the open this morning, we are seeing a massive drop in oil prices. China is one of the largest oil buyers, and a weakened Chinese economy means weaker demand.
Last Friday, the Organization of Petroleum Exporting Countries (OPEC) gathered to discuss more production limitations, but the talks collapsed.
Saudi Arabia has slashed prices and increased production, and it looks like the market is going to struggle as a “price war” heats up.
My last trade focused on the effect the Federal Reserve’s Rate cut would have. Today I’m looking for a bearish trade on a stock that will continue to fall but won’t drop immediately after the open. I think a bearish put option on Yelp, Inc. (NYSE:YELP) is a great way to add some protection to your portfolio.
COVID-19 Coverage Dominates
Last week, coverage of the novel coronavirus and the associated disease COVID-19 dominated the market. It completely overshadowed some positive reports about the U.S. economy’s performance in February.
On Monday, March 2, the Institute for Supply Management (ISM) released its Manufacturing Purchasing Managers’ Index (PMI). With a reading of 50.1, the manufacturing sector was still in expansion territory in February.
And last Friday the Bureau of Labor Statistics (BLS) reported that the U.S. added over 273,000 jobs in February.
Neither of these positive results kept investors from pushing the market lower, and that’s because they represent old data. These reports cover the month of February, but the spread of COVID-19 is an actively developing story.
It looks like COVID-19 is going to continue dominating the headlines this week, so bearish protection trades are a good way to set up for the volatility.
YELP’s Drop Below Support
A little under a month ago, YELP reported earnings, and it missed both earnings and revenue estimates. The stock had relatively stable support at around the $30 level, and it looked like that support would hold.
But as you can see below, once the S&P 500 started dropping again last Thursday, YELP’s support didn’t matter anymore.
Daily Chart of Yelp, Inc. (YELP) and S&P 500 — Chart Source: TradingView
YELP looks set to open lower this morning, but it isn’t falling as rapidly as stocks with more direct ties to the oil and gas industry.
With a bearish put option, traders may be able to set themselves up for a quick profit.
Buy to open the Yelp, Inc. (YELP) May 15th $25 Puts (YELP200515P00025000) at $1.50 or lower.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. 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.