Call-Options Buyers Take a Shot at Beaten-Up Yahoo!

A little recovery in Yahoo!'s (YHOO Quote) stock ahead of the Internet portal giant's earnings release slated for Wednesday was bringing out some call buyers taking a shot at a rally in the beaten-up stock.

Volatility Index
Today	% Change
31.52	-5.49
Source: ILX

Yahoo! is slated to post earnings after the close Wednesday. The 28-analyst First Call/Thomson Financial consensus estimate calls for Yahoo! to report earnings of 13 cents a share for the fourth quarter. In a 13-analyst consensus estimate of revenue, the Street is expecting Yahoo! to post revenue of $315.1 million. Stock of Yahoo! was up 50 cents to $27.69.

Put/Call Ratio
Today (12:30 p.m.)	Previous Close
0.66	0.55
Source: ILX

While there was some buying in some out-of-the-money calls on Yahoo!, overall volume in the options was light, according to some traders.

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Tim Boyd, of Beartooth Capital, the designated primary market maker for Yahoo! options at the Chicago Board Options Exchange, said there was some buying in the January 35 calls, but overall there wasn't a lot of action. The January 35 calls rose 1/4 ($25) to 1 1/16 ($106.25) on volume of 1,741 at the CBOE. On the Philadelphia Stock Exchange, the January 35 calls were seeing a decent amount of volume, with 2,124 contracts trading.

A call option gives the purchaser the right but not the obligation to buy the underlying security for a specific price by a certain time. January equity options expire Jan. 19. Investors buy calls hoping that the price of the underlying security will rally.

Not surprisingly, Yahoo! options are extremely expensive ahead of its earnings release. Generally, the implied volatility portion of an option's price becomes inflated ahead of a corporate news event, like earnings.

Implied volatility -- a key factor in an option's price and an indicator of uncertainty in a stock or index -- for Yahoo! options has been rising for several months. Implied volatility doesn't indicate which direction traders think the underlying security will move, just the severity of the move.

The put /call ratio for Yahoo! is currently very low relative to other put/call readings for Yahoo! over the past year. According to Schaeffer's Investment Research data, the current put/call ratio for Yahoo! is 0.53, which for Yahoo! options over the past year is very low, indicating there's a boatload of optimism on Yahoo!'s prospects on the part of investors. But all that optimism for contrarian investors, which the options market is crowded with, is bearish.