Option Bulls Pounce Amid Yahoo! Inc. (YHOO) Cost-Cutting Reports

Yahoo! Inc. (YHOO) may reduce its workforce by 15% and close a number of units, according to reports

by Alex Eppstein

Published on Feb 1, 2016 at 2:50 PM
Updated on Jun 24, 2020 at 10:16 AM

Ahead of tomorrow night's earnings announcement, Yahoo! Inc. (NASDAQ:YHOO) shareholders are digesting a fresh batch of fundamental news. Today, the stock is up 0.3% at $29.59 on reports the Internet firm will cut 15% of its workforce and shutter several business units, as CEO Marissa Mayer attempts to reduce costs. The move isn't totally unexpected, as the company has been facing mounting pressure from activist investor Starboard Value to shake up its operations. Meanwhile, a number of option speculators are wagering on post-earnings upside.

Diving right in, YHOO calls are trading at 1.5 times the expected intraday rate. Also, the 28,000 contracts exchanged so far more than doubles the number of puts on the tape. Looking more closely, the most active strike by far is the February 30 call, and it seems traders are buying to open these out-of-the-money (OOTM) options -- with data from the International Securities Exchange (ISE) confirming a portion of this action. In doing so, the traders anticipate YHOO will topple $30 by the close on Friday, Feb. 19, when front-month options expire.

In recent weeks, traders at the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have been placing similar bets at an extreme pace. This, according to the stock's 10-day call/put volume ratio of 6.99, which rests above all comparable readings taken in the last year.

However, not all of these wagers are necessarily bullish. With short interest rising over 15% during the most recent reporting period, and 7.5% of YHOO's float sold short, it's possible call buyers -- especially those targeting OOTM strikes -- are short sellers hedging their positions.

Meanwhile, the analyst crowd remains steadfast in its support for the shares. In fact, over two-thirds of analysts rate YHOO a "buy" or better, with not a single "sell" rating to be found. Should the stock extend its losses, a round of downgrades -- and/or a capitulation among "vanilla" option bulls -- could spell additional headwinds.

Speaking of losses, Yahoo! Inc. (NASDAQ:YHOO) is a long-term laggard. Since its most recent high of $36.39 in early December, the stock has surrendered almost one-fifth of its value, while facing overhead pressure from its 10- and 20-day moving averages. Looking forward, it will be interesting to see whether tomorrow night's earnings report exacerbates -- or helps YHOO overcome -- its technical woes.

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