Here is a quick summary of what I will be discussing tonight on Options Action on CNBC at 5:30pm:
FB’s Home announcement yesterday got me thinking a little bit about how Zuck plans to play in the mobile sandbox with some tech concerns that are considered to be competitors partners, and the others that are increasingly becoming competitors. To quote The Dude, “this is a very complicated case, a lot of ins, a lot of outs a lot of what have yous……” I am not gonna go into all the gory details, but I had a few thoughts on this yesterday (here). I will make one observation that seems blatantly obvious, YHOO has absolutely no plan in Mobile or Social, both of which the FB Home announcement attempts to address.
Please see my posts from last week regarding YHOO (below). I feel that a lot of very good news is priced into YHOO shares at current levels and any progress that FB makes with Home, or GOOG makes with Plus, or AAPL eventually makes in Social with an acquisition of Twitter, YHOO will clearly be left in the dust as they continue to focus on their desktop Web 1.o business.
Last week Enis sold an in-the-money call spread in YHOO to play for a mild pullback in the shares heading into the company’s Q1 earnings scheduled for April 16th. I want to take this trade a step further and commit some long premium to the near term bearish view, but give myself a little more time to have the thesis play out. This trade is not better or worse than Enis’ trade, it’s just has a different risk / reward dynamic and we are not doubling down on our near term bearish view, just 2 different traders choosing 2 different ways to express a similar view.
My Trade: YHOO ($23.30) Bought May 23/21 Put Spread for .55
-Bought 1 May 23 Put for .77
-Sold 1 Mat 21 Put at .22
Break-Even on May Expiration:
-Profits btwn 22.45 and 21, make up to 1.45, max gain of 1.45 below 21
-Losses of up to .55 btwn 22.45 and 23, with max loss of .55 above 23
Trade Rationale: As we laid out last week (below) implied vol seems fair, and given the extended nature of the chart near term, I am willing to commit long premium to express this view, while defining my risk. The Bulls argue that YHOO is rich with Cash and that further monetization of their Alibaba stake in China will cause them to buy back massive amounts of stocks, I would be more worried that they will continue to make dumb acquisitions like the one detailed below of Summly, and the investment in Dailymotion, or worse, something bigger or dumber.
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Original Post March 26th, 2013: New Trade $YHOO – Summly of the Parts
We laid out some thoughts on YHOO in the Morning Word this morning. To reiterate:
This price action comes on a day that YHOO supposedly bought a 17 year old kid’s iPhone app turned internet startup for $30million!!! The news reports that I have read suggest that YHOO will shut the company down and incorporate its technology and retain its talent. Pahleezzz. This is the exact sort of behavior that smacks of a near term top. Marissa Mayer’s presence at the helm of YHOO has clearly excited an investor base that has had little to be excited about for 5 years, but at some point very soon it will be time to put up or shut up. There was a time not too long ago, when you backed out YHOO’s stakes in Alibaba and YHOO Japan, and then their cash, that you were getting their core business for free, with the stock in the low to mid twenties, that is not the case anymore, and the incremental buyer of the shares up here will likely need to see a viable roadmap for YHOO to compete with leading web and media properties, that until now investors have given Mayer a pass on.
This is a story we liked when the sum of the parts looked cheap. Now the sum of the parts look fair to expensive, and YHOO, feeling giddy, decides to add Summly to the sum. We reacted Negatively.
Now, we have been getting short a lot of names recently, but we think this is classic quarter-end window dressing by the big boys. The defensive sectors, health care, utilities, and consumer staples, are the best performers again today, and we think the fund managers are trying to hold up the indices and trick some muppets into putting some more fund inflows into stocks at these high levels.
Regardless, YHOO feels extended, and a move back to $22 in short order seems reasonable.
TRADE: YHOO ($23.46) Sold the Apr 22 / 24 Call Spread at $1.20 to open
-Sold 1 Apr 22 Call at 1.64
-Bought 1 Apr 24 Call for 0.44
Break-Even on Apr Expiration:
Profits: Up to 1.20 between 22 and 23.20, max profit of 1.20 at 22 or below
Losses: Up to 0.80 btwn 23.20 and 24, max loss of 0.80 at 24 or above
Trade Rationale: Like the BBY yesterday, we chose to sell a call spread instead of buy a put spread because implied vol is high, and the stock likely finds support in the 22 area in the short-run. This call spread is a defined risk way to get short the stock, and still have a decent profit on a move down to that level. We chose a farther in-the-money call spread because the absolute level of volatility in YHOO is lower, so the risk of selling an out-of-the-money call spread is greater.
MorningWord 3/26/13: Back in late September when YHOO was trading ~$16, and prior to its 45% rally to almost 5 year highs, we thought the stock was cheap on a sum of the parts basis, and with implied vol at 2 year lows it made sense to take shot on the long-side (read here, also see positive view on Feb 1 here). At the time I suggested:
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.
In hindsight, this was the right call, as the combination of poor investor sentiment and low implied volatility, shortly after the addition of a new highly anticipated CEO set up for “cheap” ways to play in the options market. The chart below, shows that on a relative basis, this is not exactly the case any more, as 30 day implied and realized volatility is bit higher than where they were back in late Sept, pricing in a bit more risk to the shares at current levels.
- YHOO 30 Day Realized Vol vs 30 Day Implied Vol from Bloomberg
On a technical basis, the chart could be getting just a tad overbought, especially when you consider the lack of fundamental news that has been associated with the stock’s recent strength. The chart below shows the stock pressing up against 5 year resistance in the $24/$25 area.
- YHOO 6 Yr Chart from Bloomberg
Yesterday’s price action was quite interesting after opening flat and than opening to new 4.5 year highs, the stock stalled and closed on the low of the day. Are Buyers starting to get exhausted?
- YHOO ytd chart from Bloomberg
This price action comes on a day that YHOO supposedly bought a 17 year old kid’s iPhone app turned internet startup for $30million!!! The news reports that I have read suggest that YHOO will shut the company down and incorporate its technology and retain its talent. Pahleezzz. This is the exact sort of behavior that smacks of a near term top. Marissa Mayer’s presence at the helm of YHOO has clearly excited an investor base that has had little to be excited about for 5 years, but at some point very soon it will be time to put up or shut up. There was a time not too long ago, when you backed out YHOO’s stakes in Alibaba and YHOO Japan, and then their cash, that you were getting their core business for free, with the stock in the low to mid twenties, that is not the case anymore, and the incremental buyer of the shares up here will likely need to see a viable roadmap for YHOO to compete with leading web and media properties, that until now investors have given Mayer a pass on.
I am looking at short premium ways to play for a near-term pullback/consolidation in the shares in front of what I think will be an important Q1 report in a few weeks. Stay tuned.