Yahoo for Chickens

After Yahoo's (YHOO) management stupidly turned down the $33 offer from MSFT its shares tanked. As of my writing the shares are offered at $23.95.

Here's a relatively low-risk way to play with excellent total return from now through January 2009.

..............................................Cash Outlay...........Cash Received

Buy 1000 shares @ $23.95..............$23,950

Sell 10 Jan. $22.50 calls @ $4.40......................................$4400

Sell 10 Jan. $20.00 puts @ $1.75......................................$1750

Net Out-of-Pocket Cash.................$17,800

If YHOO shares are above $22.50 on expiration date:

Your shares will be 'called' for $22,500. Your $20 puts will expire worthless [good for you as a seller].

You now own NO shares and have NO option obligations. You hold $22,500 for your $17,800 cash outlay.

You have a net profit of $4,700 on $17,800 or + 26.4% in under 8.5 months.

This result occurs if YHOO shares go up, stay unchanged, or even if they drop to $22.50 by January 16, 2009.

Your break-even point is figured as follows:

On the shares you bought @ $23.95: $23.95 less the $4.40 call premium = $19.55 /share.

On the $20 puts: $20 strike price less the $1.75 put premium = $18.25 /share.

Average break-even on the whole package: $19.55 + $18.25 / 2 = $18.90 /share

YHOO shares could drop by $5.05, or 21%, from your purchase price without hurting you.

This worked out fabulously for those that did it when I posted a similar trade for Google (GOOG) on the day it was to release its earnings.

Comments

[WAKEUP]

Are you going to do this?

[BATO n COMPANY CHGO.]

HUH?

[mojobeta]

Real chickens recognize that unless something happens quick, YHOO's quarterly results may be lousy driving the stock to around $15 and resulting in a significant loss for participants in your investment plan. Better bet is to buy Valueclick (VCLK).