Buying Yelp Stock on Weakness? Let’s Explore the Options Roadmap

Yelp Stock

Yelp (NYSE:YELP) recently garnered attention in the stock options market due to unusual volume, driven by disappointing sales guidance. However, for investors adhering to the “buy low, sell high” philosophy, YELP stock call options present an intriguing opportunity. Let’s delve into the options roadmap to navigate this situation effectively.

Understanding the Turmoil

Last Friday, YELP stock witnessed unusual trading activity in the derivatives market, with total volume reaching 11,204 contracts against an open interest of 18,425 contracts. Put volume surpassed call volume, resulting in a put/call volume ratio of 2.25. While put options can serve as a hedge against volatility, the prevailing sentiment indicates bearish bets against YELP stock.

Yelp’s fourth-quarter earnings results were mixed, with revenue increasing by 11% to $342.4 million, slightly exceeding expectations. However, the outlook for 2024 disappointed investors, with management forecasting slower revenue and profit growth compared to analyst estimates. Consequently, YELP stock plummeted over 14% on February 16 and is down 18% year-to-date.

Assessing the Opportunity

Despite the challenges, Yelp’s diverse business coverage mitigates some concerns, as it encompasses a wide range of consumer-oriented services. This diversification suggests resilience in discretionary spending, especially amid robust job reports. For contrarian investors, YELP stock presents a potential buying opportunity at discounted levels.

Options Roadmap

For investors considering call options, the YELP Jun 21 ’24 35.00 Call offers a balanced near-expiry option. Priced at $5.20 with a spread of 5.83%, this option aligns with average analysts’ price projections of $41.40 by June expiration. Assuming no time value remaining, exercising the call could yield a profit of $120 based on intrinsic value.

For a longer-term outlook, the Jan 17 ’25 40.00 Call provides an attractive opportunity. While currently out of the money (OTM), the option offers a reasonable spread of 8.16%. With analysts projecting a target of $47.32, exercising this call could result in significant gains if the optimistic scenario unfolds.

Risks to Consider

It’s essential to acknowledge the inherent uncertainties and risks associated with market projections. Analyst estimates are subject to error, and downside risks must be carefully evaluated. In the worst-case scenario, where YELP stock falls below $38, investors could incur losses exceeding the premium paid for the options.

In conclusion, while YELP stock faces challenges, call options present an opportunity for investors with a contrarian outlook. However, thorough risk assessment and consideration of potential downside are imperative before executing any options-related strategies.

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