Wednesday Options Brief: YHOO, VVUS, SKS & STJ

Includes: AABA, SKS, STJ, VVUS
by: Interactive Brokers

Yahoo!, Inc. (YHOO) Shares of the Sunnyvale, CA-based company fell as much as 9.5% in the first half of the trading session to touch down at an intraday- and 52-week low of $13.75. Yahoo’s shares plunged after the firm reported weaker-than-expected second-quarter sales of $1.13 billion, which underwhelmed analysts anticipating, on average, sales of $1.16 billion. Citigroup analysts downgraded Yahoo!, Inc.’s shares to ‘hold’ from ‘buy’ and lowered its target share price to $18.00 from $22.00 today following second-quarter earnings. Options investors exchanged more than 145,400 contracts on Yahoo! by 12:10 pm (ET) with shares of the underlying stock trading 8.15% lower on the day to arrive at $13.96. It does not appear, however, that all traders are throwing in the towel just yet. It looks like one big player with a long-term optimistic viewpoint enacted a bullish risk reversal in the January 2011 contract to position for a rebound in the price of Yahoo’s shares by expiration. The trader sold 35,000 puts at the January 2011 $12.5 strike at a premium of $0.77 apiece, in order to purchase the same number of call options at the higher January 2011 $16 strike for premium of $0.64 each. The options strategist enjoys a net credit of $0.13 per contract on the transaction and keeps the entire amounts received as long as YHOO’s shares exceed $12.50 through expiration day next year. Additional profits are available to the investor should the price of the underlying stock surge 14.6% over the current price of $13.96 to trade above $16.00 by expiration in January 2011. Yahoo’s shares last traded above $16.00 back on May 18, 2010.

Vivus, Inc. (NASDAQ:VVUS)The biopharmaceutical company popped up on our scanners after one optimistic individual replicated a three-legged bullish options combination play that we observed during Tuesday’s trading session. Shares of the Qnexa maker rallied 7.65% to $5.48 by 11:55 am (ET). Today’s transaction is nearly identical to yesterday’s bullish trade, but the more recent play is half of the size of the original and yields a net credit that’s also half the size. The investor sold 5,000 puts at the December $4.0 strike for premium of $0.75 apiece, purchased 5,000 calls at the December $7.0 strike for premium of $1.10 each, and sold 5,000 calls at the higher December $12 strike for premium of $0.45 a-pop. The trader responsible for the transaction pockets a net credit of $0.10 per contract, and keeps the full amount received as long as the biopharmaceutical company’s shares exceed $4.00 through expiration day in December. Additional profits accumulate should Vivus, Inc. shares surge 27.7% over the current price of $5.48 to surpass the $7.00-level by expiration. Maximum available profits of $5.10 per contract are safe in the investor’s piggy bank if the price of the underlying stock jumps 119% to trade above $12.00 ahead of expiration day in the final month of 2010. Options implied volatility on VVUS is up 14.7% to stand at 74.42% just after 12:00 pm (ET).

Saks, Inc. (NYSE:SKS)The implementation of a short straddle on the high-end retailer indicates one options investor expects little to no movement in the price of the underlying shares through expiration in February 2011. Saks’ shares are currently flat on the day to stand at $7.64 just before 11:45 am (ET)). The straddle-strategist sold 2,000 calls at the February 2011 $7.5 strike for a premium of $1.20 each, and sold 2,000 puts at the same strike for premium of $1.15 apiece. Gross premium pocketed by the trader amounts to $2.35 per contract. The investor keeps the full amount of premium if, by expiration, Saks’ share price settles at $7.50. Short positions in both call and put options expose the trader to losses should the retailer’s shares rally above the upper breakeven price of $9.85, or if shares slip beneath the lower breakeven point at $5.15, ahead of expiration day next year.

St. Jude Medical, Inc. (NYSE:STJ) Options investors are buying put options on the medical devices maker ahead of its second-quarter earnings report scheduled to be released ahead of the opening bell on Thursday. St. Jude’s shares are currently down 2.35% at $34.80 as of 11:50 am (ET). Traders hedging potential share price erosion that is likely to occur should STJ’s earnings disappoint the Street on Thursday purchased roughly 1,800 now in-the-money puts at the August $35 strike for an average premium of $1.25 per contract. Put players are positioned to make money as long as St. Jude Medical’s shares fall another 3.00% from the current price of $34.80 to breach the effective breakeven point to the downside at $33.75 by expiration day in August. The increase in investor demand for put options on the stock and impending earnings lifted STJ’s overall reading of options implied volatility 12.1% to 31.49% by 11:55 am (ET).