Option Traders See Yahoo! 2.0

12/06/2012 8:00 am EST


Bulls scooped up Yahoo! January 2013 19-strike calls, writes Karee Venema of Schaeffer’s Investment Research, which seems to indicate that option traders see more upside to come.

Yahoo! Inc. (YHOO) calls have been a popular choice among option players in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open more than four calls for every put during the past 50 sessions. What's more, this call/put volume ratio of 4.14 ranks in the 79th percentile of its annual range, suggesting bullish bets have been accumulated over bearish at an accelerated clip of late.

Echoing this call-skewed trend is the stock's gamma-weighted Schaeffer's put/call open interest ratio (SOIR), which measures open interest relative to an option's gamma. Specifically, this indicator's reading of 0.40 shows near-the-money call open interest more than doubles put open interest among options expiring in three months' time or less.

Calls continued to be the options of choice in Tuesday's session. By the numbers, around 167,000 call contracts were traded, compared to roughly 100,000 puts. Short-term traders honed in on YHOO's January 2013 19-strike call, which saw roughly 12,000 contracts cross the tape. The majority of these changed hands at the ask price, and both implied volatility and open interest rose—all indications of buy-to-open activity.

By purchasing the near-the-money calls, speculators will begin to profit with each step north of $19.58 (the strike plus the volume-weighted average price [VWAP] of $0.58) YHOO takes through January expiration. This represents a 4.1% premium to current levels.

On the charts, YHOO has fared well in 2012, with the shares adding roughly 17% in that time. On a relative-strength basis, the stock has outperformed the broader S&P 500 Index (SPX) by 27.1 percentage points during the past 60 sessions. The equity's upward momentum has been highlighted by its 10-day moving average, which has ushered YHOO up the charts since mid-October. The stock recently pulled back this trendline, after touching a four-year peak of $19.16 on Nov. 27.

In Wednesday's session, YHOO was trading roughly 0.6% lower, and was last seen churning near $18.81. However, the equity's Relative Strength Index (RSI) of 73 is sitting solidly in overbought territory, suggesting YHOO may have been due for a short-term consolidation. If the stock is unable to muscle above the aforementioned breakeven level by options expiration on Jan. 18, the most Tuesday's call buyers stand to lose is the initial premium paid.

By Karee Venema, Contributor, Schaeffer’s Investment Research

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