Thursday, February 3, 2011

Yahoo! (YHOO) - Calls Trade, Spec to Upside Pushes Skew

YHOO is trading $16.80, up 1.4% with IV30™ up 8.1%. The LIVEVOL™ Pro Summary is below.


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The company has traded over 200,000 contracts on total daily average option volume of just 57,831. The largest trade was ~46.5k Apr 18/20 call spreads bought for $0.30. What seems to be escaping a lot of the news stories is that this trade was tied to stock $16.45 on 744,000 shares (or so my sources say). The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action on all the lines in the front three months. We can also see that vol is up across the board (top of the image in green font), with Mar and Apr showing the largest vol increases

As I mentioned above, the biggest trade was a call spread tied to stock. I have included the PnL chart below.

This is a bet that YHOO goes to $20, but gives up some upside above that to secure some downside protection.

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

We can see the upside skew has gone bid and that a vol difference is opening up between the front month and the back months to the upside. It's also interesting to note that the ATM vol in Feb is below the ATM vol in Mar and Apr, but the call skew (upside call vols) is above Mar and Apr. Hmmm...

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).

YHOO likes to have these very exciting days in the options market with call volume soaring, but of late it just kinda sits around the same price. The implied vol does have a tendency to sit above the short-term and long-term realized movement of the stock. Who knows what happens this time.

Possible Trades to Analyze
1. Trade the Feb/Mar call skew:
a. Buy the Feb/Mar 19 call spread for $0.18. This buys 41 vol vs a 48 vol sale.
b. Buy the Feb/Mar 20 call spread for $0.11. This buys 44 vol vs a 57 vol sale.

2. Trade the Feb/Apr call skew:
a. Buy the Feb/Apr 19 call spread for $0.33. This buys 37 vol vs a 48 vol sale.
b. Buy the Feb/Apr 20 call spread for $0.20. This buys 39 vol vs a 57 vol sale.

3. Another twist:
Sell 1 Feb 18 call @ $0.17
Buy 2 Feb 19 calls for $0.10.
Pay $0.03 and bet on a takeover or stock move above $19.03. Note that the MaxLoss on this is NOT $0.03, it's $1.03 b/c of the offset strikes.

This is trade analysis, not a recommendation.

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