Yahoo! Bulls Not Waiting for Alibaba IPO

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) 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:

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