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Option Trader Gambles Big On a Yahoo! Inc. (YHOO) Rally

Yahoo! Inc. call volume is elevated, thanks in large part to a long call spread

by 4/11/2014 2:52 PM
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Option Brief: Yahoo! Inc. (NASDAQ:YHOO) options volume is running at nearly double the average intraday pace. In absolute terms, calls hold an advantage over puts, with 100,000 contracts on the tape versus 48,000. Looking more closely, nearly one-third of the call volume can be traced to a two-legged trade that took place just after the noon ET hour.

Diving into the details, a block of 16,780 April 35 calls changed hands at $0.53 each, while a matching lot of April 37 calls did so at $0.16 apiece. According to the International Securities Exchange (ISE), the lower-strike YHOO calls were bought to open, while the higher-strike calls were sold to open, as the trader set up a long call spread for a net debit of $0.37 per pair of contracts.

By using this moderately bullish strategy, the aforementioned individual expressed confidence in YHOO's ability to rally from its current position at $33.06 beyond the 35 strike by next Thursday's close, when front-month options expire. However, in order to partially offset the cost of the long position, the trader sold the 37-strike calls -- which also has the effect of capping his gains, even if the shares streak north of $37. No matter what happens, the most the speculator has on the line is the initial net debit; meanwhile, his maximum potential gain is $1.63, or the difference between the strikes less the net debit.

Shifting to fundamentals, Yahoo! Inc. (NASDAQ:YHOO) is scheduled to announce first-quarter earnings after the close next Tuesday, just 48 hours before April-dated options cease trading. In each of the last eight quarters, the company has topped the Street's bottom-line consensus view, resulting in an average gain of 0.9% in the following session. If that happens again, it will add to the Internet giant's already impressive 35% year-over-year advance.


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