Tuesday, November 9, 2010

Yahoo (YHOO) - Takeover Rumors Push Vol and Skew

YHOO is trading $16.97, up 3.2% with IV30™ up 15.9% on takeover spec... again. The LIVEVOL™ Pro Summary is below.


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The company has traded over 160,000 options on total daily average option volume of just 43,602. Calls have traded on a 3:1 ratio to puts, and the skew is bid top the upside. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. We can see the Nov 17 and 18 calls are in play, as are the Nov 16 puts. Oddly enough, the put order flow looks long today. Nov vol is up nearly 8 points and Dec is up over 5.

The Skew Tab snap (below) illustrates the vols by strike by month.

Hi, I'd like to buy a call?... The skew is completely backwards, vol increasing to the calls. YHOO does usually have a parabolic skew - at least in the last six months or so.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Check out the vol chart at the bottom. Two things to note:

1. IV30™ is exploding.

2. It's been as high as 48 less than a month ago, though that was earnings related vol.

Possible Trades to Analyze
1. Check out the skew chart again, the vol difference between the Nov upside and Dec upside is noteworthy. Maybe a Nov 20/Dec 20 call spread paying $0.16. A touch more expensive, the Nov 19/Dec 19 call spread for $0.24 looks ok, too.

2. My favorite trade: If you want to participate in a potential takeover but don't want to get long the expensive upside premium, a neat trick is this: Sell the Nov 17 calls @ 0.43 and buy 4 of the Nov 19 calls for a total of $0.40. This trade yields a little credit, and wins huge if YHOO is taken over for a premium over $20. I have included the PnL chart for this trade below. Note, the worst case scenario is YHOO pinning at $19.

Some other ratio call spreads like this seem pretty good as well.

This is trade analysis, not a recommendation.

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  1. Does LiveVol pro produce the P and L graph above as well as all the other features?

  2. I produced it using an alpha version. So it's coming soon.