A Speculative Yahoo Options Play

Includes: GOOG, MSFT, YHOO
by: Jason Schwarz

What is the best indicator that Yahoo (NASDAQ:YHOO) stock is going to go up this week? The fact that they have yet to accept Microsoft’s (NASDAQ:MSFT) bid. The worst case scenario happens for Yahoo shareholders if the company doesn’t meet earnings estimates on tuesday and Microsoft feels that they can lower their offer as a result. If this scenario happens, shame on Yahoo management for not accepting the deal already. Shareholder value trumps any unhappiness at working for Microsoft.

At the end of the day, even the Yahoo employees will be willing to agree to the deal because of shareholder value. Nobody wants to see this stock head back to $20 which is exactly what will happen if Microsoft leaves the scene. With a current p/e of 60 and a forward p/e of 51 this stock is way overpriced. The only way for Yahoo to keep shareholders happy is to come to terms with Microsoft and that's exactly why this deal will happen.

What about the Google (NASDAQ:GOOG) hiccup? Google and Yahoo are testing an offering that provides Google search to Yahoo customers. Analysts predict this will be a win/win partnership for the two companies but a deterrent to a Microsoft takeover.

I don’t agree. I think Microsoft would love the profitability that comes from Google’s search superiority. I see the Yahoo/Google partnership happening and I also see a sweetened bid of up to $35/share from Microsoft by next week. It is in Microsoft's best interest to keep the Yahoo employees happy and that only happens with a higher counteroffer. If you’re looking for a speculative play, I recommend buying some May $30 calls. The premium is very low, if yahoo goes up to $33 you will 4x the investment. However, it is highly speculative and only speculative capital should be used.