Name That Trade: Update – $YHOO Call Spread Risk Reversal

by Dan March 7, 2013 12:26 pm • Commentary

Update March 7th, 2013:  A little over a month ago when YHOO was below $20, I outlined some thoughts on how I would be looking to play YHOO again from the long side on a pull back.  Well, I never got a pull back, and the stock has been a straight shot higher by about 15% since.

I have gotten a few questions about the trade structure from those that put it on or something similarly bullish, so I thought that I would quickly run through on a hypothetical basis what I would do now with the stock trading above the short strike of the call spread with 4 months to expiration.

Here was the original theoretical trade:

YHOO ($19.65) Sell July 18 Put to Buy July 20/22 Call Spread for Even Money
-Sell 1 July 18 Put at .65
-Buy 1 July 20 Call for 1.25
-Sell 1 July 22 call at .60


-July 18 puts are worth about .25 and with an 10 delta

-July 20 calls are worth about 3.35 with an 80 delta

-July 22 calls are worth about 2.00 with a 60 delta

SO THE PACKAGE WHICH BASICALLY HAD NO COST ASIDE FROM COMMISSIONS, IS NOW WORTH ABOUT 1.10, or a bit more than 50% of the width of the $2 call spread.


1. If I had this position on I would have my finger on the trigger to cover the July 18 Put (general rule of thumb is to not stay short single digit delta options. At this point, that short put is the only real risk in the trade, aside from losing profits.

2.  If I were to cover the put I would also consider selling a portion of the call spread to lock in some of the gains to ensure that I could not lose money on the trade.

3. Depending upon how I felt about the stocks recent assent to 4 year highs, I might consider closing the whole position and look to initiate a similar structure on a pull back in the stock.

ONE FINAL POINT: We tend to be very careful with the choice of stocks that we chose to sell naked puts in, YHOO is one that we are more comfortable than others, given their strong cash balance and holdings in Asian Assets like Alibaba and Yahoo Japan that put a floor in the stock.

On Twitter today there was a very good detailed post by @MicroFundy on how he feels the some of the parts valuation, which was certainly cheap in the mid teens, is far less so, read his post here .  I agree,we made the argument (with many others)  back in Sept (read here) that the market was basically valuing YHOO’s core U.S. business for zilch.

I think there is a decent chance, as @MicroFundy does that the stock has gotten a bit ahead of the supposed turnaround in their core business, and at current levels any downward volatility in Asian equity values could weigh heavier on YHOO than other U.S. internet stocks as so much of the YHOO bull case is dependent on a very successful monetization of YHOO’s Alibaba stake.

Without any near term news on the Alibaba front, and with what I expect to be a slow turnaround for their core business as CEO Mayer will most likely have some fits and starts to her turnaround plan, the stock could consolidate a bit, with a target of a pullback towards $21.   I am considering selling and Iron Condor on the stock looking out to May Expiration. Stay Tuned.




Original Post Feb 1st, 2013:  Name That Trade: $YHOO Edition

Just to get this out of the way, I REALLY hate equities here, I hate the amazingly bullish sentiment shift in the last month, the euphoric headlines of new all time highs in the Dow, and I hate the complacency as evidenced by the VIX below 13 and Sept futures down 4 points to 19.50 in the last month.  All of this can continue for the near future as investors remain convinced that the Fed will continue to keep their pedal on the medal as long as we continue to get data like the GDP reading we got earlier in the week.

Last year at this time I was convinced that it was AAPL alone propelling the broad market higher, and in some ways it was, the rally in Q1 2012 was fairly narrow, but that is not the case so far in 2013, there is fairly broad participation, and bullishly, despite AAPL’s 14.5% ytd decline.  Things seem fairly rosy to say the least, but I am not buying it.  That said, I am not THAT short, as I fear a little blow-off top situation in the making.

But, I am willing to get my short list of names that I would like to Buy and have thought out some of the structures I want to use to express that view.  My sense is that the next leg of the rally (that hopefully comes after a 5% sell off) will be a bit more of a stock pickers market, and in that situation I want to find under-appreciated stocks that have identifiable catalysts.


YHOO could be one of these companies/stocks.  I had a bullish trade on the stock back in Sept, right before the stock broke out (read here),  and not much has changed on the story, aside from the 20% rally in the shares.  The stock has taken a pause since the company released their Q4 earnings earlier in the week, but my sense would be the stock will once again rally into a handful of potential catalysts in the months to come.  My cyber-friend Eric Jackson, of IronFire Capital, is the main with the plan on the stock, and I find his insight on the company very helpful.  The other day he updated some thoughts post the results on Forbes (here), but the most compelling reasons to own the stock are:

1. Paying very little for core business (sum of the parts $5 in cash, Asian Assets worth maybe $11-15)

2. New CEO Mayer will lay out plan in the coming months at Tech conferences, speaking at GS in a couple weeks, and hopefully a May/June analyst meeting.

3. Continue share buybacks, company bought 7.5% of float back in Q4 and continue cost cuts

4. Articulate plan to fix core business, search, display ads and mobile, and then show ways to grow.

5. Full  monetize their stake in Alibaba in China through rumored IPO and possibly sell stake in YHOO Japan.

Communication on the above topics to the Street and investors should help sentiment and any incremental improvement in their core business or a bullish economic backdrop should help the shares.

ALL THAT SAID, I AM NOT STEPPING IN HERE.  But on a pull back to $18 or so I want to put on the following structure for no cost (this likely means adjusting strikes down a bit)

Theoretical Trade Structure:

YHOO ($19.65) Sell July 18 Put to Buy July 20/22 Call Spread for Even Money
-Sell 1 July 18 Put at .65
-Buy 1 July 20 Call for 1.25
-Sell 1 July 22 call at .60

Break-Even on July Expiration:
-Profits of up to 2.00 btwn 20 and 22, max gain of 2 above 22,
-Neutral btwn 18 and 19.65*
-Losses below 18, you will be put the stock.

*As the stock moves closer to the Put that I am short I will have mark to market losses on the structure

Trade Rationale: I want to sell puts on stocks when implied vol ticks up and I am being adequately being rewarded for taking such risks.  IV is in a fairly neutral spot right now which does not scream to be net short options, but this structure is net short premium and will carry well if the stock sits where it is for a while, but offers a great risk reward on a rally, while giving you a buffer to the downside and putting time on your side.