Yahoo! Inc. (YHOO) M&A Buzz Draws Option Bulls

Yahoo! Inc. (YHOO) option traders react to Alibaba Group Holding Ltd (BABA) buzz

Mar 4, 2015 at 12:39 PM

YHOO
BABA

Yahoo! Inc. (NASDAQ:YHOO) is defying broad-market headwinds today, up 1.9% at $43.42 amid reported rumors that Alibaba Group Holding Ltd (NYSE:BABA) founder Jack Ma considered buying YHOO. Against this backdrop, bullish bets on YHOO are flying off the shelves, with midday call volume running at twice the average pace, and outpacing put volume by a margin of 5-to-1.

Option players are hoping for a quick bounce for YHOO, with buy-to-open activity detected at the weekly 3/6 43-, 43.50-, and 44-strike calls -- the most active on the day. By purchasing the calls to open, the buyers expect YHOO to extend today's upward momentum and topple the strikes by Friday's close, when the contracts expire. YHOO peaked at $44.26 today.

However, if history is any indicator, any rally attempts could stall in the $45 region, which has acted as a technical roadblock for YHOO since late January. Plus, the March 45 strike is home to more than 12,000 calls outstanding, which could translate into an added layer of options-related resistance in the near term.

Despite Yahoo! Inc.'s (NASDAQ:YHOO) struggles on the charts -- the shares are down 13.7% year-to-date -- the analyst crowd remains overwhelmingly bullish. In fact, YHOO sports 17 "buy" or better ratings, compared to eight lukewarm "holds" and not a single "sell." Likewise, the average 12-month price target of $58.03 sits in territory not charted since October 2000. Should YHOO continue to flail, a round of downgrades and/or price-target cuts could exacerbate selling pressure on the security. (Elsewhere, sector peer BABA is in a similar situation, though the stock is up 3.1% after exploring record lows on Monday.)

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