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Yahoo! Inc. (YHOO) Option Bull Targets New Highs

Breaking down a long call spread on Yahoo! Inc.

by 3/28/2014 11:03 AM
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Option Brief: Yahoo! Inc. (NASDAQ:YHOO) is following the broader equities market into the black, as traders continue to digest Yahoo Japan's recent purchase, as well as John Hayes' decision not to seek re-election to the board. The shares were last seen 2.6% higher at $36.50, and one cautiously optimistic trader is gambling on more upside for YHOO over the next couple of months.

Within the first 90 minutes of trading, the stock has seen roughly 68,000 calls cross the tape -- more than four times the norm, and about nine times the number of YHOO puts exchanged. Almost half of the calls were attributable to a bullish spread strategy, with one trader buying to open 15,000 June 40 calls for $1.21 each, and simultaneously selling to open an equal amount of June 45 calls for $0.41 apiece. In other words, the speculator initiated a long call spread for a net debit of $0.80 per pair of contracts.

The spread will be profitable at expiration if YHOO is sitting north of $40.80 (bought call strike plus net debit), representing expected upside of 11.7% from the security's current price. However, no matter how high YHOO soars atop $45 -- which would mark a 13-plus-year high for the shares -- the most the trader can make is $4.20 per pair of contracts (difference between strikes, less the net debit), due to the sold calls. Risk, meanwhile, is limited to the initial net debit.

Had the speculator simply bought the 40-strike calls for $1.21 apiece, his risk (the premium paid) would be greater than with the spread, and his breakeven would be higher, at $41.21 (strike plus premium paid). However, his profit would be theoretically unlimited, as there's no cap on how high Yahoo! Inc. (NASDAQ:YHOO) shares could rally within the options' lifetime.


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