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Yahoo! Inc. (NASDAQ:YHOO) is up 3.1% this afternoon, amid unconfirmed reports that Chinese e-commerce concern Alibaba -- of which YHOO is a primary stakeholder -- is in financing talks with mobile messaging startup Snapchat. Options traders are responding in kind, with calls trading at more than two times the average intraday pace, and outpacing puts by a nearly 3-to-1 margin. Short-term options are in demand, too, per YHOO's 30-day at-the-money implied volatility (IV), which is 4.5% higher at 32%.
The vast majority of the day's call volume has centered on three strikes in particular: the September 40 and 45 calls, and the August 36 call. While the back-month options are being opened, they appear to be tied to stock, and part of a larger spread. However, drilling down on the front-month call, there seems to be a more "vanilla" set-up occurring.
Specifically, of the 25,654 contracts traded here, 83% have done so at the ask price, IV has edged higher, and volume outstrips open interest -- all signs of buy-to-open activity. With YHOO last seen at $36.77, these calls are comfortably in the money. In order for the call buyers to profit, though, the stock must be sitting north of breakeven at $37.25 (strike plus the volume-weighted average price of $1.25) at the close on Friday, Aug. 15, when back-month options expire. Gains are theoretically unlimited north of here, while losses are limited to the initial premium paid, should Yahoo! Inc. (NASDAQ:YHOO) settle south of the strike at expiration.