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Dissecting the $345K Bet On Yahoo! Inc. (YHOO)

Yahoo! Inc. was targeted by a deep out-of-the-money put buyer

by 5/29/2014 9:46 AM
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Option Brief: Yahoo! Inc. (NASDAQ:YHOO) has added about 8.7% since touching a year-to-date low of $32.15 in early April, ushered higher atop its 50-week moving average. From a longer-term perspective, the security has more than doubled since October 2012, when it was still struggling to break north of $16, and was last seen winking at $34.95. However, one options trader yesterday either wagered on a steep intermediate-term slide for the Internet titan, or bought options "insurance" to hedge against a downturn.

During the course of the session, YHOO saw about 30,000 puts exchanged. Half of that volume transpired in one fell swoop, as a block of 15,000 October 25 puts crossed in the final hour of trading. Specifically, the contracts changed hands at the ask price of $0.23, suggesting they were bought, and all of the volume translated into new open interest.

If the buyer is a "vanilla" option bear, she'll profit if YHOO settles south of $24.77 (strike minus premium paid) -- territory not charted since June 2013 -- at the close on Friday, Oct. 17, when the options expire. In fact, her reward will grow as YHOO moves beneath this breakeven level.

If the buyer owns a stake in YHOO, the puts are considered protective. In other words, the trader is a shareholder above all else -- meaning her primary goal remains for YHOO to extend its long-term ascent, leaving the options to expire worthless. The purchase of the puts merely locks in an acceptable price at which to hit the exits ($25 per share), should the security take a turn for the worse between now and October options expiration.

Whatever the motive, risk is limited to the initial premium paid for the puts -- which adds up to $345,000 (number of contracts x 100 shares per contract x premium paid) -- should YHOO remain atop the strike through the option's lifetime. Delta on the deep out-of-the-money put stands at negative 0.058, suggesting a less than 6% chance of expiring in the money.

As alluded to earlier, YHOO has been a beast on the charts over the past couple of years, even with its recent breather atop trendline support. Off the charts, Wall Street is awaiting the names of the 28 controlling partners of Alibaba Group -- of which Yahoo! Inc. (NASDAQ:YHOO) owns a notable stake -- which is slated to go public later this year.

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