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Alibaba IPO News Sparks a Run on Yahoo! Inc. (YHOO) Calls

Yahoo! Inc. traders are purchasing front-month calls at a rapid-fire rate

by 3/17/2014 10:49 AM
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Option Brief: Yahoo! Inc. (NASDAQ:YHOO) is 3.2% higher at $38.81, on news that Chinese e-commerce concern Alibaba Group -- of which YHOO is a primary stakeholder -- will go public on a U.S. stock exchange. Against this backdrop, YHOO options are in demand, with the stock's 30-day at-the-money implied volatility (IV) up 4.1% at 38.2%. Calls are particularly active, with roughly 33,000 contracts exchanged in the first 90 minutes of trading -- three times the typical intraday average, and triple the number of YHOO puts traded thus far.

Garnering the most attention has been the March 40 call, where close to 4,400 contracts have changed hands. The bulk of the calls crossed on the ask side, and IV is 1.9 percentage points higher at the strike, hinting at newly bought bullish bets. By purchasing the calls at a volume-weighted average price (VWAP) of $0.35, the buyers expect YHOO to topple the $40.35 level (strike plus VWAP) by the end of the week, when front-month options expire. (One bull last week, however, is anticipating a longer-term rally for YHOO, and simulated stock ownership by employing July-dated options.)

Delta on the calls has jumped to 0.24 from 0.13 at Friday's close, implying a roughly 24% chance of the contracts landing in the money at expiration. Risk, meanwhile, is limited to the initial premium paid for the calls, should Yahoo! Inc. (NASDAQ:YHOO) shares remain south of the round-number strike this week.


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