Giving Yahoo Stock One Last Chance - with a Bull Call Spread

Once again, interest in Yahoo (YHOO) is picking up now that it has lost the opportunity to do a search deal with Google (GOOG). Once again, there was speculation that Microsoft (MSFT) would make a bid to buy the company, but that idea was quashed by Steve Ballmer last Friday.   Bloomberg reported that he did say. “I’m sure there are still opportunities for some kind of partnership around search.” 

While Microsoft remains aloof, many analysts seem convinced that some sort of deal is still likely, even if it means a change in leadership at Yahoo in order for a deal to be made.

We return once again by suggesting a bull call spread based upon the possibility that something happens before the options expiration in January. With the Historical Volatility of the stock at 84, consider this idea:

•  Buy YHOO Jan 10 call YHQAB 3.375 IV 107.14 Delta .7474
• Sell YHOO Jan 14 call YHQAP 1.455 IV 97.29 Delta - .4617

        Debit 1.92 Position net delta .2857

 

With no volatility edge, this position has a maximum value of 4 points, which is the difference between the strike prices. There is good liquidity in the options and the time value is slightly positive so the net debit should be about 1.90 today, presuming the stock price remains unchanged, which is unlikely. Use the net delta value of .2857 to adjust for the price change. For each one stock point higher, the debit would be .29 more; if lower, the debit would be adjusted down by .29 for each one stock point.

On a price above 12.25, the position will make money, and with the announcement of a deal, the implied volatility will decline, which will also be of marginal help to this bull call spread.  

We suggest setting a SU (stop/unwind) at a close below 10 for a maximum loss of about $66 on a one-lot position. Based upon our mixed results with Yahoo! Inc. over the summer, this is the most we are now willing to risk.

If this trade does not work out, we, along with many others, will most likely abandon Yahoo! Inc., the stock, but continue using their web site services.

Disclosure: none

Comments

[andyn:]

Just buy a long-term put and sit back.
This company is going down the drain FAST.

Better to buy GOOG below $350 which will no doubt benefit, whether microsoft comes back or not.

2008 Nov 10 09:51 AM