YHOO – Yahoo!, Inc. – 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.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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