Options Report: Yahoo's Would-Be Sugar Daddy MSFT Looking Not So Sweet

Microsoft – There were some not-so-sweet numbers from Yahoo's (YHOO) would-be sugar daddy. Last night’s earnings miss from Seattle software hulk Microsoft (MSFT) took option traders by surprise (calls had been trading at a 6-month froth heading into the numbers, as open interest at the front-month 33 call strike swelled from 2,500 lots to some 35,000) and introduced a new level of no-nonsense in response to the hemming and hawing of its bid to acquire Yahoo.

Simply put, yesterday’s numbers indicate that Microsoft does not have the limitless wherewithal to let Yahoo name its price, nor can it afford to let the online leverage of a Yahoo acquisition go unharvested (especially given the success of Yahoo). Indeed, while implied volatility in Microsoft options has come off by 30%, Yahoo’s implied volatility is up by more than 20%. This is occurring as Microsoft shares stage a 6.6% decline to $29.70.

With twice as many calls as puts trading today, many traders may be taking fruitless upside positions at May call strikes of 30 and above off the table. Puts at the May 28 strike are being bought heavily for 21 cents apiece, suggesting more downside yet to plumb for the suddenly mortal-seeming Microsoft.

Yahoo – Shares in Yahoo (YHOO) slid 2.6% to $26.59 and its implied volatility spiked by nearly a quarter after Microsoft’s macro-soft numbers last night suggested that it may not be quite the software sugar-daddy that many Yahoo shareholders might have hoped.

With more than 168,000 option contracts in play this morning, puts and calls are trading on comparable volume, but what’s interesting to note here is the level of fresh positioning in deep-out-of-the-money front month puts at the May 20 level. These are already trading on volume of some 23,000 lots – more than twice the open interest – as the value of this position has sweetened more than 75% on back of Microsoft’s numbers alone. Granted, most of these sold to the bid, suggesting some traders turning sellers of premium on back of the volatility move today.

Rebecca Engmann Darst contributed to this report.