A purported premature panic last week in Yahoo! Inc. (NASDAQ:YHOO) has had at least one positive effect — it set up an enticing technical entry for Yahoo stock bears.
Couple that with the fact that YHOO options are boasting attractive premiums, and a move lower in Yahoo stock will have traders shouting … well, Yahooooooooo!
Yahoo’s Roller Coaster Ride
In last Tuesday’s final 20 minutes of trade, a bearish report potentially impacting Yahoo’s planned tax-free spinoff of its Alibaba Group Holding Ltd (NYSE:BABA) interest came across the news wire. In the process, YHOO shares sank by roughly 12% in about 15 minutes before finishing the day down 7.6%.
The spooked reaction by Yahoo stock holderse was word of the U.S. government’s tax man potentially mulling a more taxing, less favorable rule regarding corporate spinoffs, according to an official within the Internal Revenue Service.
Reuters called the initial reaction in Yahoo stock “premature,” and investors appeared to agree (somewhat at least) as YHOO shares reclaimed a sizable portion of the previous day’s losses.
Yahoo Stock Charts
As mentioned, the bulls did well in recapturing a good chunk of YHOO’s selloff. That said, that’s about as good as it’s going to get for the bovine-inclined.
The fact is, the overall picture for Yahoo stock looks bearish, and YHOO shares currently are offering a decent spot to initiate short positions.
Looking at the provided daily chart, a three-day move higher from Tuesday’s price swoon was actually nothing more than a well-contained counter-trend rally in YHOO. I say “counter-trend” because unlike the broader market, Yahoo’s stock price has been in a downtrend for all of 2015.
What’s more, the push higher off last Tuesday’s slide in YHOO failed at 50-day simple moving average resistance. Incidentally, the 50-day SMA just crossed below the 200-day to form a bearish death cross signal — mounting evidence of a deteriorating technical situation in Yahoo stock.
YHOO Bearish Long Put Strategy
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With underlying YHOO volatility trading above implied volatility, Yahoo options are attractively priced for a bearish long put strategy.
Checking the board, one put that fits in nicely with our bearish stance on YHOO stock is the July $41 put for up to $1. The 30-delta option is priced to more than double in premium if shares of YHOO simply retest last Tuesday’s lows in the next 18 days, based on our current implieds.
Should Yahoo stock proceed to move lower (and premiums in the calls and puts get bid higher in the event investors get a more urgent case of cold feet), gains on the July $41 put would be even larger and offer a nice spot for a profitable contract adjustment.
Should YHOO break its bearish mold, I’d personally look to exit and reduce the max loss of $1 per contract. Based on what’s been presented technically, a stop-loss on the July $41 put above $45.25, or 5.6% higher from Tuesday’s close of $42.85, makes enough sense to consider. Using this kind of money management with the July $41 put would cut down the loss to somewhere in the neighborhood of 45 cents to 70 cents.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
