NEW YORK (TheStreet) --Yahoo! (YHOO) has been an Alibaba (BABA) - Get Alibaba Group Holding Ltd. Sponsored ADR Reporthybrid trade since BABA went public (September 2014). Thus, when BABA made a new low Wednesday, that fact was not missed by YHOO longs (investors, fund managers and, of course, traders).
That hybrid thing works in both price directions, up or down. Thus, with BABA going the downward path, YHOO is tagging right along. Granted there is not much trading history to count on BABA technical patterns, YHOO has decades of charts relative to its price performance, or lack of. And YHOO's chart pattern now is quite suspect, if not quite bearish.
Fundamentally, YHOO has an excellent balance sheet as the company has about $5 per share in net cash. However, the good news ends there as YHOO trades at a forward price to earnings of 50 times as earnings per share should decline near 60% this year as compared to 2014. For next year, 2016, earnings look to be flat relative to 2015's results (fiscal year ending in December).
Technically, YHOO is attacking longer-term support, formed from April to August 2014, in the low to mid $30s. Any breakdown through that support could set up a test into the $20s. Should BABA take a similar path to lower levels (BABA's forward PE is currently 20X) it would most likely put added selling pressure on YHOO.
All good plans can go astray. And certainly YHOO could hold here if not mount a quick upside attack caused by better things that might come. But that is what my DSP (Dynamic Synthetic Put) is designed to handle if not nicely prosper from. This strategy is offered by my Big Idea posted to Option Profits today. The article covers the Dynamic Synthetic Put, which is the tactical approach for this trade. Please review that DSP posting before moving into this trade. In addition, note that this is an "Advanced" trade due to the trade's nature and composition.
And as for controlling what might go awry, note too that the trade uses precise numbers and values for both the stock and options execution. Thus, if the trade does not set up, merely take a pass and move on.
Trades: Sell short 100 YHOO at $35.00 per share and buy two YHOO September 35 calls for $1.15 (a total of $2.30).
The total capital at risk in this trade, if held to expiry, is $2.30. The suggested target to close the trade for a gain, based on the $2.30 of risk, is at a net gain of 55 cents. The suggested target to stop out the trade is at a net loss of 55 cents.
The key to the potential loss is the decay factor which occurs should the volatility "come out" of the stock. Conversely, key to the potential gain is a higher volatility and/or a 10% (approx) downward move in the price for the stock. Note: the DSP tactic can also become quite profitable should the stock move at least 10% higher in price due to the extra long call of the total position.
As always, this is a guideline, and you should always stick to your trading plan and what's best for your risk/reward tolerance.
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Skip Raschke writes regularly for Options Profits. You can get his trades first and interact with him there with a free trial.