Stocks quoted in this article:
Options speculators are rushing to place pre-earnings bets on Yahoo! Inc. (NASDAQ:YHOO - 20.29), especially on the call side of the tape. So far today, the Internet issue has seen roughly 45,000 calls change hands -- about three times its average intraday call volume, and more than double the number of YHOO puts exchanged.
Digging deeper, speculators are expecting a short-term pop for YHOO, as evidenced by the affinity for weekly and front-month calls. More specifically, the stock's weekly 2/1 20- and 20.5-strike calls have seen roughly 7,300 and 4,200 contracts traded, respectively. Volume has exceeded open interest at both strikes, and the majority of the calls have crossed at the ask price, pointing to buy-to-open activity.
More specifically, the volume-weighted average price (VWAP) of the 20-strike calls is $0.71, meaning the buyers will profit if YHOO topples the $20.71 level (strike plus VWAP) by Friday's closing bell. Meanwhile, the VWAP of the 20.50-strike calls is $0.42, indicating a breakeven level of $20.92 for the buyers. However, even if Yahoo swings and misses in the earnings confessional tonight, the most the buyers can lose is the initial premium paid for the calls.
As alluded to earlier, other option bulls are allowing slightly more time for their predictions to pan out. More than 6,500 contracts have changed hands at the February 21 call -- mostly at the ask price, hinting at buyer-driven action. Plus, implied volatility on the front-month call was last seen 8.1 percentage points higher, suggesting traders are opening new positions.
By purchasing the February 21 calls at a VWAP of $0.40, the buyers will reap a reward if YHOO conquers the $21.40 level -- in territory not charted since mid-2008 -- by the closing bell on Friday, Feb. 15.
However, not everyone on Wall Street is so optimistic. Despite outpacing the broader S&P 500 Index (SPX) by nearly 14 percentage points during the past 60 sessions, or its recent quest for multi-year highs, YHOO remains plagued by pessimism. Currently, just four analysts deem the stock worthy of a "buy" or better endorsement, compared to 21 offering "hold" or worse opinions. Likewise, the average 12-month price target on the stock stands at $19.94, representing a discount to YHOO's current share price.
Should Yahoo report stronger-than-expected earnings tonight -- as it's done in each of the past three quarters -- a wave of upgrades and/or price-target hikes could translate into contrarian tailwinds for the shares.