By David Russell of OptionMonster
NEW YORK -- OptionMonster's tracking systems yesterday detected the purchase of 20,000 September 40 calls for 75 cents and the sale of an equal number of September 45 calls for 20 cents. Volume surpassed the previous open interest in each strike, which indicates that new money was put to work.
Owning calls locks in the price where the Internet stock can be bought, while writing them obligates the investor to sell shares if they reach a certain level. Combining the two strategies controls the spread between the two prices and can result in significant leverage.
In the case of yesterday's trade, known as a vertical spread, the investor paid 55 cents and will collect $5 if Yahoo! (YHOO - Get Report) closes at $45 or higher on expiration in mid-September. That would be an 809% profit from a 25% move in the share price.
Yahoo rose 2.58% to $36.60 yesterday and has been consolidating in a tight range since April. Although the company's last quarterly results missed estimates, the market is focused on its 24% stake in Chinese e-commerce giant Alibaba.
The Alibaba initial public offering is scheduled for sometime in September, after many investors return from summer vacation. A strong IPO would likely drive Yahoo! stock higher.
Overall option volume in Yahoo! was triple its daily average, with calls accounting for a bullish 74% of the total.
Russell has no positions in YHOO.
TheStreet Ratings team rates YAHOO INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate YAHOO INC (YHOO) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, solid stock price performance, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Although YHOO's debt-to-equity ratio of 0.09 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 2.99, which clearly demonstrates the ability to cover short-term cash needs.
- Net operating cash flow has slightly increased to $357.41 million or 8.03% when compared to the same quarter last year. Despite an increase in cash flow, YAHOO INC's average is still marginally south of the industry average growth rate of 17.73%.
- Compared to its closing price of one year ago, YHOO's share price has jumped by 29.92%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- The gross profit margin for YAHOO INC is currently very high, coming in at 83.10%. Regardless of YHOO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, YHOO's net profit margin of 24.87% compares favorably to the industry average.
- You can view the full analysis from the report here: YHOO Ratings Report