New Trade $YHOO: Open Sesame

by Dan March 17, 2014 10:37 am • Commentary

In case you missed it over the weekend, Alibaba wrote on its corporate blog that it was starting the process to offer its shares in an IPO on an American exchange.  Yahoo, which owns 24% of Alibaba, and will be forced to sell half of their stake on the ipo, is up almost 3% this morning.  Make no mistake, YHOO wants to monetize their Alibaba stake and receive the cash to make more deals or to buy back stock to offset the obvious deterioration in their core advertising business.

We are not fans of Marissa Mayer’s m&a strategy so far and believe that the road to monetizing Alibaba may not be as smooth as YHOO’s price action over the last 12 months suggests given what is clearly a murky macro situation in China.

We want to make a defined risk play that YHOO will soon trade more on its own fundamentals than that of the Bubble valuation that Alibaba will receive in the U.S. public equity markets: 

On a near term basis $40 should serve as decent technical resistance (red line below), while a decent downside target would be support at the 200 day moving average around $33 (yellow below):

[caption id="attachment_37602" align="aligncenter" width="589"]YHOO 1 year chart from Bloomberg YHOO 1 year chart from Bloomberg[/caption]

From an Implied Vol basis (IV) the one year chart (below) of 30 day at the money IV (blue) vs 30 day realized vol (white) shows that the prices of options have been ticking up, while the actual movement of the stock has been settling down. Options on a relative basis are as expensive as they have been in a while.

[caption id="attachment_37603" align="aligncenter" width="589"]YHOO 1 year chart of 30 day IV vs Realized Vol from Bloomberg YHOO 1 year chart of 30 day IV vs Realized Vol from Bloomberg[/caption]

So here is the trade:

TRADE: YHOO ($38.80) Bought April 38/34 Put Spread for 1.10

-Bought April 38 Put for 1.37

-Sold April 34 Put at .27

Break-Even on April Expiration:

Profits: btwn 36.90 and 34 make up to 2.90, max gain of 2.90 at 34 or lower

Losses: btwn 36.90 and 38 lose up to 1.10, with max loss of 1.10 above 38

Rationale:  April expiration catches Q1 earnings results that should be the catalyst for the next move lower back towards initial support at $35.  We think the stock could see a bit of sell the news once the Alibaba chatter dies down a bit and investors once again focused in the core business.


Saturday, the WSJ had a great rundown of Alibaba’s business and history: