Takeover Talk Triggers a Rare Rush on Yelp Inc (YELP) Call Options

Online review site Yelp Inc (NYSE:YELP) is getting a lift today, trading 2.6% higher at $36.07, after Aegis Capital initiated coverage on the stock with an upbeat "buy" rating and a $47 price target. According to Trade-Alert, takeover chatter is also bolstering the buying power, and contributing to a jump in stock and options volume. Today's takeover talk is more of the same, as M&A rumors have swirled around YELP for months. And while skepticism has surrounded the security of late, YELP calls are flying off the shelves today, at four times the typical intraday pace.

At last check, more than 6,800 YELP calls have changed hands, compared to just 500 puts. In fact, the intraday put/call volume ratio of 0.07 sits just 2 percentage points from an annual low. Leading the action is the February 2017 38-strike call, where a block of 2,500 contracts was possibly bought to open just before 11 a.m. ET. Simultaneously, a sweep of 1,620 February 2017 35-strike calls also appears to have been bought to open -- possibly by the same trader. Notably, these trades occurred at approximately the same time YELP saw a spike in stock volume, with more than 150,000 shares traded amid an otherwise low-volume session.

Taking a step back, YELP calls have long been popular on an absolute basis, but speculators have been targeting puts at an unusually rapid rate in recent weeks, relatively speaking. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.46 sits higher than nearly two-thirds of the past year's readings.

Near-term traders have shown an even clearer preference for puts, per YELP's Schaeffer's put/call open interest ratio (SOIR) of 0.69 -- in the top quartile of its annual range. What's more, the equity's front-month, gamma-weighted SOIR of 2.91 shows put open interest nearly tripling call open interest among near-the-money options in the December series.

On either side of the tape, short-term options buyers could be getting a bargain at the moment. With a 30-day at-the-money implied volatility of 39.5% and a Schaeffer's Volatility Index (SVI) of 38% -- in the low 8th and 4th percentiles of their respective 12-month ranges -- YELP's near-term options are attractively priced, from a volatility point of view.

Outside of the options arena, pessimism toward YELP runs high. Short interest currently accounts for over 10% of the stock's available float, or roughly one week worth of trading, at average daily volumes. That, even after short interest fell by nearly 25% during the most recent two-week reporting period -- though this short-covering activity did nothing to boost the shares. Meanwhile, well over half of the analysts covering YELP rate the stock a "hold" or a "strong sell."

This overall skepticism makes some sense, given the stock's recent performance. After all, the shares have essentially been moving sideways since early November, after pulling back from their October annual high. However, the equity has added nearly 150% from its February low near $14.50. Plus, Yelp Inc (NYSE:YELP) has reclaimed the $36 mark, which roughly coincides with the positive 25% year-to-date level, as well as the 23.6% Fibonacci retracement of its annual lows and highs.