$1.5 Million Bet in YELP – Long Term

TradingPub Admin | June 20, 2013

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Special thanks to Andrew Keene of Keene on the Market for today's guest post:

Traders Make a $1.5 Million Bet on a Long Term Play in YELP

Mobile ads are becoming an opportunity gold-mine for companies who are looking for a stable source of revenue from advertising and are willing to adapt to the increase in consumerism in the mobile device industry. Yelp is one of those companies who is propitiously in the process of monetizing its mobile platforms in order to take advantage of the ways that consumers research local businesses. Revenue from mobile phone ads are predicted to increase revenue from Yelp’s brand ads by 4.5% which will be key for its growth later this year. Considering that revenues for mobile ads grew to 9% ($3.4 billion) in 2012 and are certain to rise even more this year with the ever-growing market in mobile devices, Yelp will be sure to stay on top of the local business directories with its change to mobile ads. Yelp is quickly becoming the “de facto” search engine for information and reviews on local businesses evidenced by its approximated 42% growth in cumulative reviews (39 million reviews) and 43% increase in average unique monthly users (102 million users) in Q1. Over 90% of Yelp’s revenue derives from advertising meaning that its changing approach in dealing with mobile devices could prove to be very successful. For Q2 of this year, Yelp expects revenues in the range of $52.5 – $53.5 million, and for the full year it expects net revenue to be from $215-$218 million.

Yelp also shows promise in its aggressive moves overseas. In 2012, Yelp bought out Qype, Europe’s largest local reviews site, and consequently gained access to 2 million reviews and 15 million different users in 13 different countries. Yelp also established a foothold in the Asian market in Singapore in 2012 as well. Yelp’s strategy is to penetrate one huge market in each new country it spreads to in order to efficiently maximize its user coverage so that it will eventually be able to compete with the other contending behemoths like Google, Yahoo, and Facebook. Because these corporations are seeking independent avenues to develop their own local-listings services, partnership between Yelp and any of these companies is highly unlikely. In the end, Yelp’s adaptation to mobile ads and pursuit of international growth will have to be profitable enough for it to stay ahead of the competition and ensure its own future success in the local business review market.

Unusual Option Activity:

We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. At we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial.  We offer this service through our 7 hour daily LIVE trading room or through Premium Twitter feed with all entries, exits, and unusual options activity tweeted all day long:

Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a 7 step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.

The “Institutional Trade”:

Yesterday a trader bought 5050 YELP Jan 32-40 Bull Call Spreads for $2.90.  Lets breakdown this trade:

Their Risk: $290 per 1 lot

Their Reward: $510 per 1 lot
Their Breakeven: $34.90
Cash Outlay: $1,464,500

Greeks of the Trade
Delta; Long
Gamma: Long
Theta: Short
Vega: Long