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Yahoo! Inc. (YHOO) Option Traders Respond Bullishly to Tumblr Buy

YHOO bulls are purchasing out-of-the-money call options

by 5/20/2013 2:15 PM
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Internet issue Yahoo! Inc. (NASDAQ:YHOO) has erased early losses to trade 0.7% higher, with the stock last seen at $26.70. Options traders are responding to today's M&A news in a bullish manner, picking up calls to bet on additional upside for YHOO in the short term. So far today, the stock has seen around 47,000 calls cross the tape -- a 51% mark-up to its average intraday call volume, and more than three times the number of YHOO puts exchanged.

Most popular is the July 28 call, which has seen close to 6,300 contracts change hands at a volume-weighted average price (VWAP) of $0.78. Most of the calls have crossed on the ask side, and volume has exceeded open interest at the strike, pointing to newly bought bullish bets.

The buyers will begin to reap a reward if Yahoo! Inc. travels north of $28.78 (strike price plus VWAP) by July 19, when the back-month options expire. From current levels, it would take a rally of 7.8% in order for YHOO to hit breakeven -- which stands in five-year-high territory. Risk, meanwhile, is capped at the initial premium paid for the calls, should the stock remain beneath the strike through the next couple of months.

Prior to today's announcement that Yahoo will acquire Tumblr for $1.1 billion, the options crowd was singing a more bearish tune. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call open interest ratio of 0.32 ranks in the 73rd percentile of its annual range, implying that option buyers have picked up YHOO puts over calls at an accelerated clip during the past couple of weeks.

What's more, the consensus 12-month price target on the security stands at $26.72, just a stone's throw from YHOO's current perch. Should more analysts follow the lead of Topeka Capital, which today hiked its price target on the stock to $31 from $29, YHOO could enjoy contrarian tailwinds.


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