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YELP Skeptics Could Get Spooked by Post-Lockup Surge

Bears had surrounded YELP ahead of today's move higher

by 8/29/2012 11:41 AM
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Option players targeted Yelp Inc (NYSE:YELP - 21.30) on Tuesday, with calls and puts trading at approximately two times and four times their respective average daily volumes. By the numbers, roughly 8,000 call contracts and 15,000 put contracts changed hands throughout the session.

At the NASDAQ OMX PHLX (PHLX), a number of these puts were used to construct bearish spreads in the October series of options. Specifically, two symmetrical blocks totaling 966 contracts changed hands at the October 14-strike put and the October 17-strike put. The former crossed the tape near the bid price at $1, while the latter traded at $2.45, or around the ask price. A net debit of $1.45 per pair of contracts was incurred for the play. Additionally, open interest increased at both strikes overnight, indicating new positions were created.

By initiating this strategy, speculators are hoping YELP falls below breakeven at $15.55 (the bought strike minus the net debit) by October expiration. In the best-case scenario, YELP will finish right at $14 on Friday, Oct. 19 -- allowing the October 14 strike to expire worthless, and the October 17 put to achieve its maximum profit potential of $1.55 (the difference between the two strikes , less the net debit). While this reward is limited by the presence of the sold 14-strike put, the traders have also cut their risk to $1.45 (the net debit paid) per contract, compared to $2.45 for the lone October 17 puts.

Tuesday's trend toward puts was just more of the same for options players. During the course of the past 10 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and PHLX have bought to open two puts for every call on the equity. Plus, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.26 shows put open interest outweighs call open interest among options expiring within the next three months.

The glass-half-empty approach hasn't been confined to the options arena, either. Short sellers increased their bearish exposure by 41.5% during the latest reporting period, and short interest now accounts for a brow-raising 19.3% of the stock's float. In fact, short interest is at its highest level since the stock went public in early March.

In light of YELP's technical backdrop, it's not difficult to sympathize with Wall Street's skeptical stance. From its March 2 trading debut through Tuesday's close, the stock shed roughly 26% of its value. Also, over the past 40 sessions, the equity has lagged the broader S&P 500 Index (SPX) by 28 percentage points, on a relative-strength basis.

However, YELP has made quite a rebound in today's session. Despite the widespread doom-and-gloom surrounding today's expiring lockup on 52.7 million shares, it seems shareholders aren't ready to part with the stock. YELP has jumped roughly 17% at last check, and is now well north of the $20 mark -- a level that has alternately served as both support and resistance for the equity.


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