Thursday, September 5, 2013

YELP: App play

Update 10/9/2013: I rolled out of my October options on YELP on Sept. 27, several weeks early because of the possibility of a U.S. government default. (See "Rolling away from risk".) The stock price continued to rise until Oct. 4 and then declined, punching below the 10-day price channel on Oct. 8, thereby sending a signal to close the position on confirmation and to calculate the results.

Over the 21 days my position was open, YELP shares gained 9.7%, or 168.5% annualized. My bull put option spreads produced a 19.1% yield on risk, or 332.3% annualized.

Update 9/6/2013: YELP moved decisively above its third-wave high (see the Elliott wave discussion and chart, below), meeting my criteria for opening a bull position. I structured it as a short vertical options spread sold for credit and expiring in October, short the $57.50 put and long the $55 put. 

The position has scarcely any leverage -- 1.3:1 -- and a hedge providing a 9.7% margin of profitability at expiration below the entry price.

Yelp Inc. (YELP), after its initial public offering on March 2, 2012, went through the usual angst of a newborn tech issue, swinging wildly but going nowhere, for eight months. Think of it as a period of gestation.

In the ninth month, on Nov. 15, 2012, YELP gave birth to an uptrend from $16.32 that carried the stock to a height of $59.35 last Aug. 2. From there the newborn faltered, stumbling to $46.96 on Aug. 16, and then dusted itself off and rose again.
YELP 180 days 4-hour bar

On Wednesday YELP broke above its 20-day price channel and confirmed the bull signal today by trading still higher, up to $58.66 so far.

YELP has had a good run, and as always after such a meteoric rise, the questions a trader must ask is, "How high is high? Where does it end?"

The Elliott wave count suggests that the end is in sight but not necessarily at hand.

I can see two counts for the present positioning of YELP in its uptrend.

It's possible to count four completed waves in the uptrend, with a fifth wave still needed to top it off. For shorter-term traders like me, there is money to be made in a fifth wave. I don't consider the fifth in itself to be a reason to shy away.

Elliott wave lore says the third wave cannot be the shortest of the three rising waves in an uptrend. However, wave 1 carried the price up by $16.48, and wave 3 rose by $32.60, so that requirement has already been met.

The best I can say from this count is that wave 5 will go higher than $59.35, but I can't say how much higher. Fifth waves, like thirds, can extend themselves and carry the price quite a distance higher.

In fact, they can turn out to be the longest of the three waves in the direction of the trend.

The counterargument -- the other count -- is that the wave 4 correction looks incomplete. If it is an a-b-c flat, then arguably the c wave has yet to happen. And it's possible that wave 4 could turn out to be a complex correction pattern that would take longer to complete.

The wave 2 correction count isn't entirely clear to me, but it looks like zig-zag. The two correction waves often have different patterns from each other, and that suggests that wave 4 will be a flat or something more complex.

In any case, a clear push above the wave 3 high, $59.35, would suggest that wave 4 is complete and wave 5 is underway. That level is only about a dollar above where the stock is trading now. It doesn't cost much to wait.

YELP's odds, certainly, argue the bullish case. 

This is the fourth bull signal since the beginning of the uptrend in 2012. The three completed signals were all successful, for an average yield of 20.8% over 45 days. 

There has been one completed bull signal since the downside correction wave 4 began last May, and it produced a 45% profit over 40 days.

YELP was one of 13 symbols that survived my initial screening last night. (See "Thursday's Prospects").

All confirmed their bull signals, leaving me with a Herculean task in narrowing the field.

I rejected four because their ratings by the stock analysis company Zacks were either neutral or bearish. Conformity to the Zacks rating is a very optional preference, but because I had so many symbols to work with, I could afford to be quite strict. The symbols are HIMX, CBS, SOHU and TPX.

I cut one stock, CIHKY, because of very low liquidity, under 3,000 shares a day.

Five stocks had options that I can't trade because the open interest is too low to meet my standards: WCRX, PXD, REGN, YPF and MDSO. Giving my choice, I prefer options over shares because options increase my tactical choices.

Two stocks, ETFC and BIIB, were declining intraday in today's trading, although they were above the breakout level and so had confirmed their bull signals. However, I don't like to trade stocks that are moving against the trend, even in the shorter term.

I may, however, take a further look at BIIB. It is tracing a triangle and has liquid options, which raises some interesting tactical possibilities.

Yelp Inc., headquartered in San Francisco, California, runs the popular app that let's people review and read reviews of local businesses. I use it continually here where I live, in Portland, Oregon, to guide me to the many awesome indy restaurants that characterize this wonderful city.

Like so many Internet companies, Yelp is supported mainly by advertising, fourth-fifths bought by local businesses.

But a cool product doesn't necessarily translate into cold cash, especially in the world of the Internet.

Analysts have doubts about Yelp's prospects, collectively coming down at a negative 24% enthusiasm index.

The financials, certainly, aren't encouraging. The company reports a negative 7% return on equity. On the plus side, it has no long-term debt.

Yelp has reported earnings for six quarters and hasn't earned a profit in any of them. The most recent quarter saw the smallest loss of the six. Earnings have surprised to the upside three times, including the most recent quarter, and to the downside three times.

Institutions own 85% of shares and the price has been bid up to an extremely high level. It takes $20.42 in shares to control a dollar in sales, this for a company that hasn't made a dime in profit yet.

YELP on average trades 2.6 million shares a day, supporting a moderate selection of option strike prices with open interest running to two and three figures. It would be possible to construct a vertical options spread for YELP, but just barely.

The front-month at-the-money bid/ask spread on calls is fairly low at 5.8%.

Implied volatility stands at 58% and has been meandering sideways since mid-August.

Options are pricing in confidence that 68.2% of trades will fall between $48.87 and $68.37 over the next month, for a potential gain or loss of 16.6%, and between $53.94 and $63.30 over the next week.

Trading in options is quite active today to the bear side, with puts trading at twice their five-day average volume. Calls are running at 16% above average volume.

The fair-price zone on today's 30-minute chart runs from $57.27 to $58.68, encompassing 68.2% of trades surrounding the most-traded price, $58.09. The stock opened below the zone and in the first half hour rose to the most-traded price. It has since drifted toward the top of the zone.

Yelp next publishes earnings on Oct. 28.

Decision for my account: I see money to be made in a fifth wave, but I want to be sure that I'm really in that wave before making the trade. I'm adding YELP to my watch list and will consider entering once it has pushed above the wave 3 terminus at $59.35.


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

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 decision decisions for his or her own account, and take responsibility for the consequences.

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