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Big Trade Fuels Yelp Inc’s (YELP) Options Activity

Yelp Inc’s (NYSE:YELP) most active option yesterday was the August 34 call, and it was almost entirely the product of a single trade. Less than 15 minutes before the closing bell, a block of 4,500 of the aforementioned calls traded at the ask price of $1.55. Based on an overnight surge in open interest at the strike, it’s safe to assume these options were bought to open.

The speculator is banking on the shares of YELP — currently trading at $29.00 — to climb to $35.55 (strike price plus premium paid) by August 16, when back-month options expire. Profits are unlimited north of that mark, while downside is limited to the premium paid.

The bullish wager is part of the cloud of optimism surrounding Yelp Inc. The stock’s current International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) 50-day call/put volume ratio is 2.5, meaning that — over the past 10 weeks — 25 calls have been bought to open for every 10 puts. The ratio registers in the 84th percentile of its annual range, confirming a higher-than-usual inclination toward calls.

Similarly, Schaeffer’s put/call open interest ratio (SOIR) on YELP is 0.5, which indicates that call open interest is double put open interest, among options expiring in the next three months. This figure sits at an annual nadir, meaning that call open interest, relative to put open interest, is at its highest level in the past year.

And why shouldn’t it be? Yelp Inc (NYSE:YELP) has tacked on a cool 53.8% year-to-date, and has outperformed the broader SP 500 Index (SPX) by more than 23 percentage points over the past three months. A continuation in this growth pattern over the summer could bring yesterday’s calls in the money.

Finally, it must be said that a lofty 18.5% of outstanding YELP shares are being shorted, which would take over six sessions to unwind, given the stock’s typical trading day volume. Should the bears cry uncle in the coming weeks, this sideline cash could push the equity further north, spurring yesterday’s trader onto even greater gains. Or perhaps he’s actually one of the people shorting the stock, in which case, the trade is functioning as a hedge against his own short stock position.



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Mystic Maggie

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