A Yahoo Straddle Plays on Volatility

by Dan Passarelli | March 28, 2011 8:47 am

The past couple of weeks implied volatility has been high as over-reacting traders snapped up options in a panic. Now, alas! Traders appear to be overly complacent. As a market taker, there is nothing that gives me greater pleasure than market over reaction. Options trading[1] investors should smell what I’m cooking: Opportunity.

With volatility around 40% lower than it was just eight sessions ago in many names, options are ripe for buying. There is no more perfect example of this than in Yahoo! (NASDAQ: YHOO[2]). Right now the YHOO April 17 Straddle can be bought for around $1.10. That is, buy the YHOO Apr 17 Call and the YHOO Apr 17 Put.

Considering that YHOO’s stock price was nearly a dollar lower during Thursday’s session, and has had several sessions in which the daily range was greater than 0.50, I’d say this is a pretty cheap straddle. The 30-day historical volatility is above implied volatility.

Couple that with the fact that there is still world-wide risk that hasn’t significantly changed over the past two weeks, meaning there is a reasonable chance of a large, volatile move in the near future. That makes the straddle even more attractive.

Dan Passarelli of MarketTaker.com[3] writes the Market Taker Edge options newsletter. Dan has more than 17 years’ experience in the options industry as a market maker, Options Institute instructor and author of “Trading Option Greeks.”

Endnotes:

  1. Options trading: https://investorplace.com/options-trading/%20
  2. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  3. MarketTaker.com: http://markettaker.com/market_taker_edge/

Source URL: https://investorplace.com/2011/03/straddling-yahoo-plays-volatility-yhoo/