Tuesday, April 29, 2014

YELP - Earnings Preview and Something I Bet You Didn't Know

YELP is trading $58.81, up 5.9% with IV30™ down 0.3%. The Symbol Summary is included below.

Provided by Livevol

This a pre-earnings note. Earnings are our for YELP 4-30-2014 (tomorrow) after market close (AMC).  When it comes down to it, it's the skew that really has me interested.

A special note:  This post will naturally have some of my opinion spread throughout and please do note before hand I have a negative pre-disposition to YELP.  The idea that this entity was worth ~$8B blows my mind.. The fact that it is now worth $4.2B still has me perplexed, though not as wildly as before.

I love the idea of a place to go to get ratings on everything.  But, the accusations I have heard second and third hand of the way this firm deals with bad ratings has left a sour taste in my mouth.  Also... $4B?... really?

Anyway, take this negative bias into account when you read this article -- it's opinion and can be absolutely dead wrong.  I'll try to remain agnostic in the analysis to follow.

Let's start with the Charts Tab (two-years), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see the incredible run up from ~$15 to over $101 in less than two-years.  Then of course, comes the remarkable deflation where the stock has seen a 40%+ decline in less than two-months.

OK... That's the stock.  Now let's turn to the IV30™ chart in isolation for the same two-year period, below.

Provided by Livevol

We can see that the IV30™ is in fact right at an annual high.  I think that's correct.  Much like TWTR and LNKD with earnings out today (notes below), the option market is finally reflecting the risk in these momentum tech names (unlike AMZN and NFLX for example and very much unlike AAPPL -- though AAPL is not a momentum sock at all).

LNKD - Earnings Preview: Option Market Explodes to New Highs in Risk

TWTR - Pre-earnings Note: The Art and Science of Odds Making with Options. Did You Know This? The Pros Do.

AAPL - Earnings Review: How the Option Market Blew It... And We Knew a Week Ahead of Time.

AMZN - Earnings Review: Stock Gaps Off of Earnings; and We Knew it Yesterday.

Let's focus a little more myopically on just earnings events (represented by the blue "E" icons above).  Here is the same volatility chart, but only focusing on the earnings vol.

Provided by Livevol

I note that the level of the implied today is above four of the last six earnings cycles, right in line with one of the last six and a tiny bit below the last cycle.  basically, it's elevated, but still well within the reasonable realm for this company.

But, the real oddity is the skew. The Skew Tab snap (below) illustrates the vols by strike.

Provided by Livevol

So... this skew shape is actually "normal."  The oddity is that on the day before earnings in a weekly option in a stock down 40% in seven weeks in a momentum tech name, skew does not feel like it should be "normal" at all.  This skew reflects a much higher probability of a downside move than an upside move.

Is this weird for YELP?  Actually, yes. Let's look back to last earnings on 2-5-2014 and the skew on that day, below.

Provided by Livevol

Look how flat that skew is.  Basically the option market reflected no bias in the probability of an upside or downside move. Now, to be fair, that skew shape is also weird, as I would have expected to have seen a a parabolic skew, which would have reflected elevated tail risk (in both directions).  For the record, last earnings release YELP went from $75.23 to $89.46 in a day and to $91.11 two days after that.  So the skew was way off...

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Using the $58.50 strike straddle the option market reflects a stock price range of ~[$50.70, $66.30] by the end of trading on May 2nd.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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