Weighing Options in Yelp

 | Jul 30, 2014 | 12:55 PM EDT  | Comments
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Stock quotes in this article:

yelp

,

twtr

Stocks don't care about macro details right now. A big GDP number doesn't mean buyers will come flying into the market. This morning looked a bit more like a few panicky short sellers covering positions rather than strong-hand buyers. Even though the "contra" trade is looking for a drop in the market, it is just about the sentiment I get from every trader I know. I'm just not sure how "contra" it is.

Twitter (TWTR) was strong Tuesday -- stronger than I anticipated. Still, it will make for a nice double, with a possibility of a little more upside, but still solid overall. I will admit it is hard not to be a little disappointed since I was leaning bullish, but I didn't commit fully to it and this is what happens when you make that choice. Fortunately, it is fleeting since green is green.

Yelp (YELP) is another big one today. This has been a big mover, but it offers a few approaches to the trade. First, the all green right-hand column means buyers come in for YELP during the day. The stock has closed higher than the open four straight times by an average of 5%, so grabbing some stock, calls or call spreads at the open is certainly intriguing. Options are a bit tougher than stock since they won't open as quickly nor as smoothly as the stock. Even the implied move looks lower around 12%. Remember, that is for the weekly options that expire Friday. The monthly options are pricing in a move around 14%, which is still much lower than past reports. The stock has moved at least 12% before expiration hit all four reports, with a move above 15% three times (15.8%, 42% and 28.9% were the maximum moves).

So, while I don't like the Aug. 1 straddles, I do like the Aug. 16 straddles around $10.50 to $10.70. I would even consider September $72.5 puts/$77.50 call strangles around $11.25. A move around 19% before September expiration is very possible in my view. I will take a small flyer on each.

For those wanting to play the front month and are willing to take an aggressive approach, ratio spreads or skip-strike butterflies would be my approach in both directions. I favor the Aug. 1 $73-85-90 call butterflies in a long 1 by short 3 by long 2 ratio, and using the same ratio on the put side with the Aug. 1 $75-63-58 strikes for $6.50 or less. Breakeven is on a 7.4% move, but this has risk on a very big move, which is where those August and September volatility plays come in. If I went with long 1 by short 2 ratios spreads for Aug. 1, they would be long on the $78 call and $70 put side with the shorts being $85 calls and $63 puts, but that trade is not for the faint of heart.

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