Max Grigoryev
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Max Grigoryev in Fundamentality,

Yelp: High Risk, High Return - Buy Straddle

Yelp is going to release their earnings today after the closing bell, this is one of the most volatile stock in the tech field right now. After the most recent earnings announcement the stock soared more than 23%. However, the stock didn't have such a significant fluctuations after Q4'15 and Q3'15 results - it moved less than 5%. My yesterday's VRX strategy was super-profitable and almost guaranteed a hefty 51% return. 

To be honest, Yelp for me is in the same line with Pandora - both of them have strong competitors such as Google, Apple and some smaller niche companies. Yelp surprised everybody this year - Q1'16 results were much better than expected. Revenue was slightly higher than consensus - $153.71M vs $153.33M, however, Yelp's EPS was significantly lower than estimates. I think that all the tech companies should first think of business efficiency and then start scaling the business. If the business isn't efficient and you want to scale it - you'll get a bubble which will burst at some point of time. SunEdison is just a great example why you should first think of your margins. 

Analysts are very conservative regarding Yelp and 20 of them iterated a 'hold' recommendation, while 8 analysts have 'outperform' recommendation in addition to 3 'buy' and 3 'underperform'. Here is analysts estimates:

- revenue is expected to grow:

- EPS will slowly narrow according to analysts: 

Source: Financial Times

Yelp's straddle will cost you a lot - more than 12%, however, traders are definitely waiting for the volatility jump, that's why OTM options are also expensive. It means that you can buy a $32 straddle and then sell OTM put and call options. In this case your initial outlay will be the following:

It's still not a cheap strategy at all, but check the P&L table:

As you can see from this table, if the stock goes up or down more than 10% after the earnings you will get a tasty return. You maxim profit in this case would be almost 62% of the initial outlay - if the stock goes up to $36.67. If the stock falls, maximum return is around 26% which is still enough. Especially for a few days time frame. 

Just in case if you think this strategy is too risky for you, you can just sell a strangle. Everything depends on whether you are ready to take some risk or not.