Yelp Options Bears Make Rare Appearance After Downgrade

Call buyers have been more active than usual in recent weeks

Yelp Inc (NYSE:YELP) stock is spiraling today, after Morgan Stanley downgraded the online review name to "underweight" from "equal weight," and cut its price target to $29 from $31 -- a nearly 20% discount to last night's close. At last check, YELP shares are down 6.6% to trade at $33.35, and bearish options trading is running hot.

So far today, around 2,500 puts and 2,000 calls have changed hands on Yelp, three times what's typically seen at this point in the day. The February 34 put is most active, and it looks like new positions are being purchased here for a volume-weighted average price of $3.42. If this is the case, breakeven for the put buyers at the close on Friday, Feb. 15, is $30.58 (strike less premium paid).

More broadly speaking, it's been call buyers who have been active in Yelp's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 3.70 ranks in the 85th annual percentile, meaning calls have been bought to open over puts at a quicker-than-usual clip.

While it's possible some of this activity is at the hands of vanilla options bulls, it's also likely short sellers are using the long calls to hedge against upside risk. Short interest on YELP jumped 64.5% in the most recent reporting period to a record high 13.62 million shares, or nearly 21% of the equity's available float.

Whatever the reason, it's an attractive time to buy premium on short-term YELP options. The security's Schaeffer's Volatility Index (SVI) of 44% ranks in the 16th percentile of its annual range, indicating near-term contracts are pricing in relatively low volatility expectations at the moment. Plus, its 30-day implied volatility skew of -9.9% ranks in the 1st percentile of its 12-month range, pointing to near parity between call and put option premiums.

Looking at the charts, YELP shares have shed roughly 36% since their late-September three-year peak at $52.50, due in part to an early November post-earnings bear gap. While the stock has recovered from its Nov. 9 annual low of $29.35, it's run into trouble in the formerly supportive $36 region, home to its descending 50-day moving average.