Earnings Preview: 2 Ways to Trade Yahoo Stock (YHOO)

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Yahoo (YHOO) is set to release its first-quarter earnings report after the close Tuesday afternoon, and the sentiment backdrop for Yahoo stock is messy at best.

yahoo stockYHOO is expected to post a profit of 31 cents per share on revenue of $1.09 billion, but the whisper number of 30 cents per share from EarningsWhisper.com hints at lower expectations on Wall Street.

During the past four years, Yahoo has topped or matched consensus expectations every quarter for four consecutive years. Despite this track record, YHOO has averaged a single-session post-earnings decline of more than 2%. Meanwhile, heading into Tuesday’s report, implieds for Yahoo’s weekly Oct $25 options are pricing in a post-earnings move of roughly 5.6%, meaning that Yahoo stock could move as high as $40.65 or as low as $36.35.

Yahoo stock chart yhoo
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Technically speaking, a break above $40 would be a major coup for Yahoo stock. This region has long been a sticking point for the shares, with YHOO unable to hold its ground north of $40 for the past year. On the downside, a move to $36 would pace Yahoo stock below key support at the $37 level and the stock’s 200-day moving average — a region that provided key support last week.

Overall, it appears that YHOO options traders are anticipating a rally. In fact, call open interest for the weekly Oct $25 series of options totals 111,843 contracts, compared to put open interest of 34,835 contracts. The result is a bullish put/call open interest ratio of 0.31, with calls more than tripling their put counterparts for options set to expire at the end of this week.

That said, some of this call activity on Yahoo stock could be the work of short sellers hedging their positions. During the most recent reporting period, the number of YHOO shares sold short soared more than 49% to total 60.9 million shares. At roughly 6.6% of Yahoo’s total float, or shares available for public trading, this wealth of short interest has the potential to create a short-squeeze situation — if the company can exceed expectations this Tuesday.

Turning to Wall Street, the brokerage community is on the fence when it comes to YHOO stock. According to data from Thomson/First Call, analysts have doled out 14 “buy” ratings, compared to 13 “holds” an no “sell” ratings. What’s more, the 12-month price target for YHOO stock rests at $43, a mere 11% premium to Friday’s close.

Those traders looking to position themselves ahead of Yahoo’s quarterly report will want to exercise more caution than usual given the current volatility in the market.

As such, there are two potential paths to pursue heading into Tuesday’s report:

2 Options Trades on Yahoo Stock

Bull Call Spreads: The first is a contrarian play, designed to take advantage of Yahoo’s strength, the stock’s oversold condition, and an unwinding of bearish sentiment on the shares. Traders going this route might want to consider a Nov $37/$40 bull call spread. At last check, this spread was offered at $1.48, or$148 per pair of contracts. Breakeven rests at $38.48, while a maximum profit of $1.52, or $152 per pair of contracts, is possible if YHOO stock closes at or above $40 when November options expire.

Selling Puts: Alternately, if YHOO stock’s short-term outlook concerns you, a weekly Oct $35 put sell has a high probability of finishing out of the money. At last check, this option was bid at 18 cents, or $18 per contract. As usual with a put sell, you keep the premium as long as YHOO stock closes above $35 when the weekly October options expire (at the end of this week). On the downside, if YHOO trades below $35 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $35 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/yahoo-stock-yhoo-options/.

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