Shares of Yahoo (YHOO) were close to taking out their 2015 and mid-May low of $39.12. The one-year chart shows a break below $39 could lead to a further backtest to $38-$36.
Yahoo came into the year just north of $50, and the 20% discount looks tempting to start nibbling, but there is still risk involved.
The most recent pullback comes amid talk that the IRS and Treasury Department would unlikely approve the proposed tax-free spinoff of Yahoo’s stake in Alibaba (BABA). This overhang has dogged the stock for months, and the uncertainty is clearly weighing on shares. Wall Street seems unclear on how big the impact would be on the stock, but a spinoff taxed at 40% would likely knock shares down $10. A favorable ruling could produce a $10 move the other way.
At current levels, and with the spinoff expected during the fourth quarter, my guess is that Yahoo will either be testing $50 or pushing $30 by the end of 2015. The longer-term options look enticing to play this possible move over the next six months, so I started doing some digging.
I might look to go long if shares do hold $40 this week for a possible rebound to $42-$44. The YHOO July 42 calls (YHOO150717C00042000) are what I’m eyeing, and speculative traders could get positioned early now at current levels. I’m going to be waiting to see if support holds.
If shares fall below $40, the YHOO July 39 puts (YHOO150717P00039000) could be used to play further weakness. I am less inclined to buy puts at the moment, as I am watching the CBOE Volatility Index (VIX) very closely.
Another “death cross” has recently formed on the VIX with the 100-day moving average crossing below the 200-day moving average. Although the index closed above its 50-day moving average on Friday, I think there’s a possibility for it to test to single digits this year. The 52-week low is at 10.28, which was reached last July.
The VIX will have a lot to do with where the market is headed. If the bulls can get the VIX below 12.50 this week, there’s a good chance that a test to 52-week lows for the volatility index could come.
At this point, the prudent trade could be strangle on Yahoo. Traders could buy both the YHOO January (2016) 45 calls (YHOO160115C00045000) and the YHOO January (2016) 35 puts (YHOO160115P00035000) at current levels. This would create a strangle option trade, which would do well if Yahoo! shares do trade to $50 or test $30 by mid-January of 2016.
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