Does YHOO Option Action Signal A Bottom?

January 11, 2001
Jon Najarian

Today
we are watching with interest the dollar-weighted action in our Internet basket.

America Online
(
AOL |
Quote |
Chart |
News |
PowerRating) is seeing some significant call buying, particularly
in the January 40 â€” 55 strikes. For that reason, the calls are seeing 3-to-1
money flows vs. the dollar-weighted put volume.

Also,
despite the negatives associated with the Yahoo! Inc.

(
YHOO |
Quote |
Chart |
News |
PowerRating) announcements
last night, weâ€™re seeing dollar-weighted money flowing into call and puts on a
nearly equal basis. That might not seem as extraordinary to those of you that
donâ€™t track such money movement as we do, but for the last two months,
dollar-weighted puts have outpaced calls by up to 200-to-1.

If
indeed the action signals a bottom in YHOO, some traders may consider the APR
25 â€” 35 Bull-Call Spread. Our numbers show they could buy the APR 25 calls for
6 1/4 and sell the APR 35s for 3, or a debit of just 3 1/4. The spread is
intrinsically (in-the-money) worth 1 1/4,as the stock is trading for 26 1/4 as of
11:00 am CST. Thus, theyâ€™re only paying $2 in time premium. Paying 3 1/4 for a
10-point call spread in one of the premiere names seems like a fair value to us.