Tim Bovee, Private Trader: YELP, CELG Analysis

Update 5/6/2015: The bear call spread that was the remaining portion of YELP expired without value on Saturday for maximum profit, completing the unravelling of the position. All components of CELG also expired without value.

YELP shares declined 1.4% over eight days, or a -782% annual rate. The options position produced a -90.6% yield on debit, for a +4,315% annual rate. The shares received as a result of the options exercise produced a -16.5% loss on debit, for a -6,008% annual rate.

Update 5/6/2015: YELP declined sharply after earnings were announced, moving my net position deep in the money for a potential loss.

A portion of my YELP position was assigned after the close on May 5. I won't calculate profit and loss until the entire positon is complete, most likely at the end of the week.

Here's what happened:

The short $45 put option is assigned, forcing me to sell shares at the strike price but allowing me to keep the options premium for a profit on the options themselves.
Short shares of YELP are put into my account as a result of the assignment, and I sell them at the market price for a loss.
That leaves a single long $43 put, which I sell for a loss.

My YELP position has been transformed into an out of the money bear call vertical spread open in my account. If it remains OTM, then it will expire at the end of the week for maximum profit.

The crowd-sourced reviews publisher Yelp Inc. (YELP), headquartered in San Francisco, California, publishes earnings on Wednesday after the closing bell, and the pharmaceutical house Celgene Corp. (CELG), headquartered in Summit, New Jersey, publishes on Thursday before the opening bell.

I shall use the MAY2 series of options, which trades for the last time nine days hence, on May 8

The goal of my trades is to construct direction-neutral positions with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.

[YELP, CELG in Wikipedia]

YELP

Ranges

Click on chart to enlarge.

YELP at 10:30 a.m. New York time, 30 days hourly bars

Implied volatility stands at 60.5%, which is 4.7 times the VIX, a measure of volatility of the S&P 500 index. YELP’s volatility stands in the 89th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	56.11	60.98	52.51
Lower	46.39	41.5	44.25
Gain/loss	9.5%	19.0%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

The proposed trade places both the one standard deviation and the chart ranges within the profit zone.

Iron condor short the $56.50 calls and long the $58.50 calls,
short the $45 puts and long the $43 puts
sold for a credit and expiring May 9
Probability of expiring out-of-the-money

MAY2	Strike	OTM
Upper	56.5	78.5%
Lower	45	76.3%

The risk/reward ratio stands at 1.5:1. The premium is $0.75 ($0.34 for the calls and $0.41 for the puts), with shares trading for $50.83.

CELG

Ranges

Click on chart to enlarge.

CELG at 10:28 a.m. New York time, 30 days hourly bars

Implied volatility stands at 39.6%, which is 3.1 times the VIX. CELG’s volatility stands in the 84th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	119.85	126.87	120.72
Lower	105.83	98.81	111.70
Gain/loss	6.2%	12.4%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

Given the downtrending nature of the price today, I've chosen to trim the profit zone at the top in order to gain an acceptable risk/reward ratio. The lower upper boundary still has a better 70% probability of expiring out of the money for maximum profit.

Iron condor short the $117 calls and long the $119 calls,
short the $105 puts and long the $103 puts
sold for a credit and expiring May 9
Probability of expiring out-of-the-money

MAY2	Strike	OTM
Upper	117	71.7%
Lower	105	78.9%

The risk/reward ratio stands at 1.5:1. The premium is $0.75 ($0.49 for the calls and $0.26 for the puts), with shares trading for $112.86.

Decision for My Account

I've opened positions in YELP and CELG as described above.

-- Tim Bovee, Portland, Oregon, April 29, 2015

References

My volatility trading rules can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.