Are Yahoo! Inc. (YHOO) Bulls Setting Themselves Up for Disappointment?

Heavy accumulations of call open interest could stunt Yahoo! Inc.'s (YHOO) short-term progress

by Karee Venema

Published on Mar 9, 2015 at 1:39 PM
Updated on Apr 20, 2015 at 5:32 PM

Yahoo! Inc. (NASDAQ:YHOO) is off 1.4% today to linger near $42.83, but options traders are keeping the faith. At last check, calls had a roughly 8,000-contract lead over puts, and per the equity's 30-day at-the-money implied volatility -- which is up 5.6% to 27.9% -- short-term contracts are in high demand.

Drilling down, YHOO's weekly 3/13 44-strike call has received the most attention, and it appears some of the activity is of the buy-to-open kind. By initiating the long calls, traders are betting on YHOO to climb north of $44 by week's end, when the series expires. The options market isn't too confident of an in-the-money finish, as delta on the call is docked at a slim 0.21.

From a wider sentiment perspective, options traders have shown a preference for near-the-money calls among options slated to expire in the next three months, as evidenced by YHOO's gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.83. In the near term, this could create some headaches for YHOO in the $44 -$45 region, as peak call open interest in the weekly 3/13 series can be found at the 44 strike, while a lofty amount of call open interest in the March-dated series is located at the 45 strike. Heavy accumulations of call open interest such as these can create headwinds for a stock, as the hedges related to the bets unwind ahead of expiration.

Daily Chart of YHOO Since January 2015

On the fundamental front, YHOO's board of directors received a letter from Starboard Value LP -- which owns a roughly 0.8% stake in Yahoo! Inc. (NASDAQ:YHOO) -- saying that the company needs to explore avenues for creating value for shareholders, including a possible $4 billion buyback. Specifically, the activist investor said that while YHOO's spinoff of its Alibaba Group Holding Ltd (NYSE:BABA) stake was a "good first step," it is still "in need of a major overhaul."

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