Options Update: Yahoo! Call Volume Spikes on Google Ad Partnership
According to a television interview on Bloomberg yesterday, Google
(
GOOG |
Quote |
Chart |
News |
PowerRating) is planning on moving forward with its controversial search-advertising partnership with rival Yahoo!
(
YHOO |
Quote |
Chart |
News |
PowerRating). The looming deal has caught the attention of federal regulators, who will inevitably scour the terms of the agreement for anti-trust violations. Currently, GOOG accounts for more than 60% of the Internet-search market, while YHOO holds about a 16% market share. The arrangement was announced in June, and the U.S. Justice Department launched a formal investigation in July.
In the Bloomberg interview, Google CEO Eric Schmidt said that “We [Google] are going to move forward… We are in the process of talking to the government. They’ve not indicated one way or the other how they’re dealing with us.” Continuing, Schmidt expressed a little concern about government action, but remained confident that Google was on solid footing. “We always worry a little bit, but we think our arguments are pretty strong,” Schmidt told Bloomberg.
Bullish options players were chomping at the bit to jump on YHOO following the interview, as more than 32,000 calls traded on the security before midday. Comparatively, only 3,877 puts had crossed the tape when I pulled my figures. This preference for calls over puts equates to a put/call volume ratio of 0.12, indicating that 8.25 YHOO call options have traded so far today for every 1 put option. What’s more, the 32,000 calls traded so far today is nearly double YHOO’s average daily call volume, placing the stock on our Intraday Volume Explosion List – and it’s still early in the session.
Call Buying on Yahoo!
Digging into the YHOO call volume, we finally arrive at what caught my eye today. More than 20,000 calls have changed hands at the stock’s January 2009 30 strike this morning. Nearly all of the volume was concentrated into small blocks of 100 to 300 contracts, and most of this activity changed hands at the ask price. While the heavy call buying is interesting for downtrodden YHOO all by itself, 1 rather large block immediately stood out. At 10:14 a.m. Eastern time, a block of 13,948 contracts traded at the ask price of $0.23. As a caveat, it is possible that this block represents the closure of a previously sold position on YHOO (i.e. buy to close activity). However, given this morning’s GOOG news, and that the shares are clearly not threatening to place a sold January 2009 30 call in the money, I feel fairly certain that today’s activity is initiation of a new long position on YHOO.
Running with this call-buying theme, let’s how the trade actually plays out. The hypothetical trader purchased 13,948 YHOO January 2009 30 calls for $0.23, or a total outlay $320,804 — ($0.23 * 100)*13,948 = $320,804. For this trade to reach breakeven, YHOO would need to rally an impressive 55% to $30.23 per share. We arrive at this by adding the cost of the option ($0.23) to the strike of the purchased 30 call ($0.23 + $30 = $30.23).
Even with the GOOG search-ad agreement, I find it difficult to fathom a 55% move in YHOO shares before the options expire on January 16, 2009. Still, the trader has nearly 5 months until the position expires, and the Justice Department’s decision could come down on GOOG’s side in this case. That said, let’s see if the stock’s technical picture or sentiment backdrop provide any clues on the potential for profit from this position…
Technically Speaking
Looking at a monthly chart of YHOO, several potential hurdles for a January 2009 30 call position quickly emerge. The stock has steadily declined under resistance at its 10-month and 20-month moving averages since January 2006, closing only a handful of months above this duo during this time frame. Furthermore, the 10-month trendline has descended below long-term resistance at the 25 level, and the 20-month is quickly descending into the region.
Additionally, YHOO’s 40-month trendline has crossed below round-number resistance at the 30 level. The shares haven’t bested resistance at their 40-month since June 2006, while YHOO has only closed only 2 months above the 30 level during this time frame. On the other hand, the shares are trading near support at the 19 level, which could provide a short-term bounce for YHOO. But the impact of this support on today’s hypothetical January 2009 30 call is barely worth mentioning.
The Sentiment Drivers
Scanning YHOO’s sentiment indicators reveals that today’s attention to call options is not a new development for this underperformer. The stock’s Schaeffer’s put/call open interest ratio (SOIR) has been in decline mode since late April, dropping more than 50% from a reading near 0.80 to today’s perch at of 0.34. What’s more, this ratio ranks below 87% of all those taken during the past year, indicating that speculative investors have been more bullish toward YHOO only 13% of the time during the past year.
Outside of the options pits, we have a wealth of pessimism among Wall Street analysts toward YHOO. According to Zacks.com, 14 of the 20 brokerage firms following the shares rate them a “hold” or worse. This configuration holds the biggest potential for making an impact on a purchased January 2009 30 call. Should the YHOO/GOOG deal pass the Justice Department’s anti-trust sniff test, we could see several of these bearish analysts upgrade YHOO on the potential merits of this search-ad sharing pact.
The Verdict?
After looking at the technical picture and sentiment indicators for YHOO, I see a little upside potential for the shares. The technical hurdles for a January 2009 30 call position are daunting, especially as the stock moves closer to breakeven above the 30 level. The key for this position to reach profitability is not only government approval of the deal, but also a positive reaction from the analyst community. Options traders already have high expectations for YHOO, and this could lessen the impact of any positive news. Combine this last sentiment indicator with the heavy overhead technical resistance, and I’m still very skeptical that a January 2009 30 call can achieve profitability before the option expires – even with 5 months of time premium baked into the trade.
Did you know that you can get headlines for my articles emailed directly to you? If you’d like to take advantage of this service, simply go to www.Schaeffersresearch.com and sign in with your Schaeffer’s username and password. Once on the alerts page, select author from the first drop down box, select how often you want to be alerted (intraday, daily, weekly, or monthly), and enter Joseph Hargett into the third box.
Newly revised and updated, Bernie Schaeffer’s home study program, “10 Days to Successful Options Trading,” provides a foundation for your options trading success. Includes easy-to-follow guide, CD, DVD, and a special report — Click here to learn more.
Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.