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Yahoo! Inc. (YHOO) Option Traders Brace for a Fall

Are YHOO shareholders locking in gains with protective put options?

by 4/8/2013 1:23 PM
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Broad-market headwinds are keeping Yahoo! Inc. (NASDAQ:YHOO) just south of breakeven, with the stock testing familiar support atop its 20-day moving average. From a longer-term perspective, the Internet issue has been on a quest for multi-year highs, topping out at $23.90 just last week. Against this backdrop, YHOO traders are picking up long-term put options to either gamble on a steep pullback, or to insure their winning stock positions.

So far today, Yahoo has seen roughly 18,000 puts change hands -- more than twice its average intraday put volume, and about 50% more than the number of YHOO calls exchanged. More than half the action has transpired at the January 2014 17-strike put, which has seen around 10,700 contracts cross the tape. Digging even deeper, a block of 8,000 LEAPS traded at the ask price of $0.42, suggesting they were bought. Plus, implied volatility is trending higher at the long-term, out-of-the-money strike, hinting at fresh initiations.

Assuming the buyer is a "vanilla" option bear, the goal is for YHOO to breach the $16.58 level (strike price minus VWAP) within the next several months. From Yahoo! Inc.'s current perch at $23.29, it would take a decline of around 29% in order to hit breakeven. Should the equity remain north of the strike, risk is capped at the initial premium paid for the puts.

However, if the puts were purchased as portfolio "insurance," the trader is a stockholder above all else. In other words, he or she wants YHOO to extend its long-term ascent, but the puts lock in an acceptable price at which to unload the shares ($17), should the security take a turn for the worse in the long term.

As alluded to earlier, Yahoo has been a broad-market standout on the charts, outperforming the S&P 500 Index (SPX) by more than 13 percentage points during the past three months. Off the charts, the company is slated to unveil its first-quarter earnings on April 16, and has exceeded the Street's per-share profit projections in each of the past four quarters. Another positive earnings surprise could shake loose the lingering skeptics on Wall Street, including the 17 analysts who maintain "hold" or "sell" ratings.


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