Yelp reports earnings February 9 after the bell. The stock is currently trading down from a peak of $43.41 going into earnings. Implied Volatility (IV) is moving sidewise and currently at about 54.99. A look at a three year weekly chart shows that IV usually declines between 10 and 30 after earnings (see below).
Implied Move is currently around $4.00 +/-
Here's the trade: sell a long dated bearish call spread:
If IV reduces by 30:
- A move down to $37.33 nets a profit of approximately $1800.
- A move up to 45.33 still nets a profit of about $350, due to the reduction in IV and the overall net positive effect on your short call.
Here's the risk profile for your reference:
Disclosure: I am/we are short YELP.
Additional disclosure: I am short the long-dated bearish call spread detailed in the blog post.