When I wrote "Wide Options Skew Heightens Risks Of Trading Yelp.com Lockup Expiration," my main point was that Yelp.com (YELP) put options seemed too expensive to take the risk of playing the potential downside impact of YELP's lock-up expiration. A fake-out opening drop of 4.2% soon followed by a 22.7% close was definitely not on my radar. Trading volume was a YELP record of 8.8M shares (excluding the first day of trading) but nowhere close to the 52.7M shares that insiders can now sell. So it seems insiders generally decided to skip the cash register and hold onto their shares, and shorts had little choice but to rush for the exits (shorts were 21.8% of float as of August 15, 2012).
Now that the stock has soared so high, THIS is the time to consider placing bearish trades. Such a trade may now seem a bit contrarian, but the options skew on YELP remains very wide. The implied volatility at yesterday's close for "near/in-the-money" puts was almost two times larger than calls. Options players still expect significant downside from current levels. The difference now is that the surge in the stock has greatly reduced the risk of playing that downside. As a confirming thought experiment, consider whether you prefer to sell puts when YELP is at $18 or around $22?
Chart of Implied Volatilities for YELP September options
(Click to enlarge)
YELP options skew remains very wide
Source: Schaeffer's Investment Research
I decided to execute a calendar spread to try to take advantage of the wide skew by selling September puts to pay for going long October puts (delta neutral, meaning that "small" moves in YELP would not cause the spread to gain or lose money). The idea was that the September puts would expire worthless or with a significant loss while the downward gravitational pull would eventually take its toll on YELP by October expiration. With the options skew remaining high, the delta neutral calendar spread stayed roughly even throughout yesterday's rally. After YELP rallied to its 50-day moving average (DMA), I decided to increase the bearish bet by buying September puts. This positioning now gives me more protection in case YELP declines significantly in the next three weeks, but it costs me a little more if YELP does not decline at all from current levels.
So, overall, I do not expect YELP to be able to hold current levels, even if the general stock market manages to rally from here. The triple top in YELP is extremely compelling, and it keeps me biased toward fading rallies in YELP.
YELP lock-up expiration makes company 20%+ more valuable (snapshot taken morning of Aug. 30).
Disclosure: I am short YELP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am net short YELP through a combination of long and short puts