Selling An Iron Condor On Yelp

Directional Assumption

Largely neutral (with moderate bullish bias)

The Narrative

Barron’s positive pick on this stock – premised on post-Covid recovery. Analysts have an upside target of between $34 – $40.

Yelp Stock Deserves a Positive Review. Expect a Reopening Rebound. https://www.barrons.com/articles/yelp-stock-deserves-a-positive-review-51608836323

My personal take is that recovery will take a while (especially for demand for services). Recent quarterly results of Yelp seems to support this (shown below). I believe that any positive vibes would have been factored in the share price.

From a technical perspective, it is reflecting a rather bearish trend with a support at the 50D MA. I may anticipate that it will re-bound off the 50D MA and to trade in a range-bound pending further tangible recovery in the real economy. Resistance is expected at the 34-level.

Trading Strategy

Typically, I will sell an Iron Condor or any vertical spread if the IV Rank is above 30%. Despite the IV Rank is relatively low at 16.1% for Yelp, I consider its Implied Volatility of >50% to be reasonable in order to sell an iron condor on this stock. I may consider the following iron condor strategy:

  1. 33% OTM Short Put (at $25) and long put at $23 – implying I am moderately bullish
  2. 15% OTM Short Call (at $34) and long call at $36 – $34 being the min target price by the analysts as per the analyst
  3. Expected credit premium more than 33% of option width (i.e $0.66) = $0.73
  4. 54 DTE (19 Feb 2020)

Possible Downside Risks

The next earnings announcement is on 11 Feb 2021, anticipating a future increase in volatility (negatively impacting on a short iron condor strategy). Nevertheless, I intend to manage the iron condor at 21DTE (which is about last week of Jan 2021, about 2 weeks before the earnings announcement date) or at target profit of 50% of credit premium received.

Disclaimer: This is not an investment / trading advice or endorsement. Please refer to the general disclaimer of this blog. If in doubt, please consult with your licensed financial planner.

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