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Yahoo! Inc. (YHOO) Traders Target Long-Term Call Options

Breaking down today's affinity for July-dated YHOO calls

by 2/15/2013 2:38 PM
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The shares of Yahoo! Inc. (NASDAQ:YHOO - 21.04) are trading modestly lower this afternoon, taking a breather from their recent uptrend. Nevertheless, it looks like one options trader may be rolling his bullish position higher, in order to gamble on more long-term upside for the search giant.

In afternoon action, YHOO has seen roughly 50,000 calls cross the tape -- a 34% mark-up to its average intraday call volume. For comparison, fewer than 9,900 YHOO puts have changed hands thus far.

Digging deeper, more than half the calls have traded at the July 21 and 23 strikes. More specifically, symmetrical blocks of 10,500 contracts crossed around midday -- the 21-strike calls at the bid price of $1.42, suggesting they were sold, and the 23-strike calls at the ask price of $0.72, implying they were likely bought. While volume has exceeded open interest at the July 23 call, pointing to new initiations, implied volatility on the July 21 calls is trending lower, hinting at a potential closeout.

In other words, it appears one speculator rolled his position up, cashing in his July 21 calls by selling them to close, and using part of the proceeds to buy higher-strike calls in the same series. In order to profit, the trader needs YHOO to surmount the $23 level -- a feat not accomplished since mid-2008 -- within the next several months.

Of course, while we won't know until open interest shakes out over the weekend, it's possible the trader sold the July 21 calls to open. In this instance, he would've initiated a bear call spread for a net credit of $0.70 per pair of calls. However, this seems rather unlikely, considering the sold calls are narrowly in the money, and there's so much time working against him. (Remember, option sellers' worst enemy is time.)

At last check, YHOO is down 0.7% to hang out in the $21.04 neighborhood, erasing initial gains after touching the $21.25 level in early trading. From a longer-term perspective, the equity has added 44% since early September, led higher atop its 10-week moving average. In fact, the stock touched a new four-year acme of $21.43 earlier this week, as traders digested comments from CEO Marissa Mayer.


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