Trade Update Dec 12th, 2012: Talk about messing with a perfectly good trade by trying to get a little cute. In late Sept when YHOO was seemingly left for dead (stock around $16) I bought some Jan upside calls with the thought that the sum of the parts was being undervalued in front of a period that could see a few catalysts that could wake the street up a bit. To be honest it didn’t even take any catalysts to wake investors up, as the market rally broadened out, investors were clearly looking for opportunities to buy laggards (see RIMM, DELL, CSCO).
With YHOO now well through my long and short strikes of the Jan 17.50 / Dec 18 Call Spread that I legged into for .17, the spread barely has a delta, and I see little reason to continue to hold it. The only thing now I can do is not be too pissed that I out smarted myself by turning the long calls into a diagonal calendar, thus capping gains, but wait for an opportunity to get back in on the long side on a pullback.
Action: Sold to Close YHOO ($19.36) Jan 17.50 / Dec 18 Call Spread at .52 for a .35 gain
Trade Update Nov 5th, 2012: YHOO is up about 7% since my Jan call purchase (below) in late Sept, and just now making new 52 week highs. On a near term basis, the stock looks a tad extended to me and I want to reduce my cost basis by selling a higher strike call against the one that I own, and thus lower my break-even, reducing my risk, but also capping my gains. The slight twist on this trade from a normal call spread is that I am selling a nearer dated expiration, which gives me a chance to collect premium in the near term with a chance to put on an even cheaper structure after Dec expiration.
Action: Sold to Open YHOO ($17.24) Dec 18 Call at .22
New Position: Long YHOO ($17.24) Jan2013 17.50 / Dec 18 Call Spread for .17
New Break-Even on Dec 2012 Expiration: If YHOO is below $18 on Dec Expiration the Dec 18 calls that I am short will expire worthless, and I will essentially own the Jan 2013 17.5 calls for .17, I will then look to sell a higher strike Call against the Jan’s to make a new vertical spread further reducing my cost basis.
While this looks like a lot to pay for a .50 wide call spread, you have to remember that this is a diagonal calendar spread, my hope is that the stock moves a little higher but below 18. Also, the the December calls will decay at a faster rate than the Jan’s, so even if the stock goes sideways this will more than cover Jan decay.
Original Post Sept. 27th, 2012: New Trade YHOO: Sum of the Parts from GS and Activist Says Stock Too Cheap; We think Vol too Cheap
I am in the process of having a little Twitter Conversation with Eric Jackson of Iron Fire Capital, he is a smart guy, who has been an activist involved in YHOO for years. He alerted me to the fact that Goldman Sachs re-initiated YHOO with a Buy and a 12 month price target of $22.
From GS analyst Heath Terry’s note to clients this am:
Yahoo has been added to the Buy list with a 12-month, $22 price target. We believe the value of Yahoo’s balance sheet assets and the core business are worth more than the current stock price and that capital allocation actions over the coming months will serve as the catalyst to drive that revaluation. While we have long been more negative on Yahoo’s prospects, the uncertainty of the Alibaba stake’s value has been reduced, the company has a new CEO, and the Yahoo Japan stake has appreciated by 30% since May 21, creating a much more attractive risk/reward scenario.
Catalyst: “Some” of the Parts. With $5.80/share in cash, $4.00/share in Yahoo Japan (after tax), and $5.00/share remaining in Alibaba ownership, Yahoo core and the $0.83 in GAAP EPS we expect in 2013, represents $1.30/share. The return of 85% of the initial monetization, $3.00/share should serve as a catalyst for shareholders to realize the value of the parts.
Valuation: Our $22 target on YHOO values the balance sheet assets at $10.6 bn or $14.79/share and Yahoo at $7.17/share or 6X 2013E EV/EBITDA, in line with other ex- or slower growth companies like AOL (5.0X), WebMD (8.2X), Orbitz (4.2X), comScore (11.2X), and Expedia (9.0X).
MY VIEW: While this is not a name I have given a lot of thought of late, Eric’s thought is that most PM’s have not either….earlier this morning though, someone bought 10k of the Nov 17/18 Call Spreads for .12, great risk reward. On the Vol front, as the realized volatility of YHOO has moved lower, 3 month implied volatility is now near 2 year lows. Here is the chart that tells the story:
The market is pricing in a No Catalyst environment from now until Jan13 expiry. While the market may be right, the risk/reward is very favorable, with the upside obviously skewed to higher volatility between now and Jan13.
MY TRADE: YHOO ($16.07) Bought the Jan13 17.50 calls for .39
Break-Even on Jan13:
Profits above 17.89, losses of up to .39 btwn 17.50 and 17.89 with max loss of .39 below 17.50.
I WILL LOOK TO SPREAD THESE IF AND WHEN THE STOCK MOVES HIGHER. GENERALLY I DON’T LOVE TO GET LONG EXPOSURE ON DAYS LIKE TODAY WHEN STOCK UP ON A SPIKE, BUT I AM GOING TO DO MORE WORK ON THE NAME AND LEG INTO THE POSITION