YELP – Get Short, Long Puts for Trend Line Break

Get short on YELP with a 17 NOV 44P. Low risk, high reward, and a 50/50 shot. Join our chat for ideas like this as they develop, hit me up on Stocktwits (jbabin387) for info. This is my 6th play of the $1,000 to $10,000 challenge.

Thesis

Yelp has been riding the same channel up since earnings on 8/3. Volatility started to increase on 9/25, and we’ve seen two failed attempts to take the next leg higher, forming a double top. Albeit skewed, the principal remains the same in that it has rejected taking the next leg up. Having just had earnings, the stock price moved lower on high volume, even rejected a gap up on 11/2. As volume has tapered off from the earnings event, the price has drifted down, setting up to challenge the ascending trend line. A competing descending trend line is also in play that ties in all the highs since earnings. One of these trend lines will prevail. It’s my bet that the more recent trend line with the recent high volume high momentum moves will prevail. Really, it’s a 50/50 shot, so if the risk reward is right this is a bet we’re going to want to take.

The Trade

I entered the 17 NOV 44 Put option when the stock price was $45.07, 4 contracts at a price of .65 each. First, let’s establish the point where we accept our thesis as broken, which would be when the descending trend line is broken.The nice part is that it’s only going to take 18 trading hours to find out, which means we won’t experience much decay.

Now, with the this particular option contract, worst case scenario is that it breaks it first thing in the morning tomorrow, at a stock price of about $45.25. We stand to lose about $40 if this happens. However, if the lower trend line is broken we’re looking at a target price minimum of $44, but I’d like to see the trend line hold up much lower, with the lowest possible price at $41.67 (keep dreaming). The more realistic price target has a profit of $158.02, a 1:3 risk reward ratio. Great odds. Of course, the dream target nets $1400 profit, but let’s not even consider that yet.

It’s not too late to enter, the price is only .69 so the risk reward is still very similar. Here’s an image of the risk profile:

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