Wednesday, August 29, 2012

A Mad Scramble for Yelp Inc (NYSE:YELP) Puts

Yelp Inc (NYSE:YELP)’s lockup period expires on Wednesday, allowing company insiders to dispose off their stock in the market.  What this means is that the period of 180 days after the IPO, in which early investors, Chairman Max Levchin and CEO Jeremy Stoppleman included, had to compulsorily hold on to their stock will come to an end. 

Can YELP Rebound? Find Out Here

The effect of the expiration is already evident with significant bearish activity on the stock.  Yelp had entered the market with 7.15 million shares initially.  The stock’s free float will now jump by seven times with more than 52 million shares being freed up.

The last two weeks have seen the Yelp scrip drop a whopping 26% thanks to the hectic activity in its put options.  While a call option gives the holder the right to buy the stock at a specific price on a later date, a put option gives the holder the right to sell.  The outstanding Yelp puts are 33,561 compared to the outstanding 32,520 call contracts. 

The high level activity in puts indicates that market participants want to take advantage of the weakness in the scrip.  $17, $18 and $19 are the active puts.  Traders are also shorting shares, that is, selling shares they do not own, confident that they will be able to buy them later at a lower price and make profit.

Such lockup expiration has triggered falls in other scripts in the recent past.  For instance, Facebook’s scrip had dipped to an all time low when 271 million shares were freed up while Groupon shares had slid to half the IPO price.  What happens to the Yelp stock on Wednesday remains to be seen.

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