YELP: Stock Rises After Earnings; Vol Diff Opens

Yelp Inc. (Yelp), formerly Yelp! Inc., connects people with local businesses. Its users contribute reviews of every type of local business, from restaurants, boutiques and salons to dentists, mechanics and plumbers.

This is a quick note on an interesting calendar vol diff I found using a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let's start with the Skew Tab to examine the line-by-line and month-to-month vols.

The skew shapes are pretty normal with the downside puts priced to higher vol than the ATM options and OTM calls. What we do see quite clearly is the monotonic vol increase from the back to the front. It's that vol diff between the first two months that triggered the scan.

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

On the stock side, we can see that YELP just released earnings a week ago (AMC). The stock popped from $18.82 to $22 (on 8-2-2012), or 17% off of the news. Here's a quick snippet:

Shares of lifestyle recommendations and ranking purveyors Yelp (YELP) today are up $3.14, or almost 17%, at $21.96, after the company last night beat Q2 estimates and offered better-than-expected Q3 and year views, buoyed by results from local and brand advertising.

There were no upgrades today, that I can see, and as a consequence, the Street is still entirely lukewarm on the stock, with four hold ratings on Yelp.

The company got plenty of admiration for its accomplishments, but the valuation is tempering the enthusiasm today, even though price targets are actually comfortably above the current share price.

Yelp is expected to lose 31 cents a share this year on a GAAP basis, but it trades at 129 times next year’s expected 17 cents a share profit.

Aaron Kessler of Raymond James today reiterates a Market Perform rating on the shares, while raising his estimates for this year and next, writing that the valuation is too rich for his taste.

Citigroup’s Mark Mahaney reiterates a Neutral rating on Yelp, and a $28 price target[...]

Jason Helfstein with Oppenheimer & Co. reiterates a “Perform” rating on the shares, while raising his price target to $25 from $24 [...]

Goldman Sachs’s Heath Terry reiterates a Neutral rating on the stock, and a $27 price target, [...]

Source: Barron's via Yahoo! Finance; YELP Leaps 17%: Street Cheers Metrics, Can’t Stomach Valuation. Written by Tiernan Ray.

I do note that since 8-2-2012 and the 17% rise, YELP has risen another 17% as of this writing over the last five calendar days. Impressive...

Looking to the vol side, we can see that the implied collapsed after earnings (which is expected), and has remained relatively quiet during the stock move up. The 52 wk range in IV30™ is [50.42%, 115.96%], putting the current value in the 45th percentile (annual).

Finally, let's turn to the Options Tab, for completeness.

Across the top we can see the monthly vols are priced to 84.05%, 77.36% and 70.42% respectively for Aug, Sep and Nov. Looking to some OTM options (as an example), we can see the vol diff between the Aug/Sep 28 calls is more than 11 vol points, while the Aug/Sep 21 put spread shows more than a 12 point vol diff.

This is trade analysis, not a recommendation.