Trade Update $YHOO – Taking Small Loss Ahead of Earnings

by Enis April 16, 2013 10:47 am • Commentary

Trade Update April 16th, 2013, 10:47 am:  Since I initiated this short-biased trade on Yahoo a few weeks ago, the stock is up about 2%.  Yahoo reports earnings after the close today, so I have a decision to make.  If I had a longer-dated short biased trade (like Dan’s May structure), I likely would just sit through the earnings event.  I don’t expect much upside to YHOO from current levels, even in the event of good news.  However, my trade expires on Friday, and I am less confident in my view of what happens to YHOO over the next few days.  Fortunately, I can close my trade out for a small loss, since this was a trade with little decay to start.

Action: Bought to Close the YHOO ($23.86) Apr 22 / 24 Call Spread for $1.46 for a $0.26 loss

Original Post March 26, 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.