Yahoo! Inc. (NASDAQ:YHOO) stockholders are sitting on a powderkeg.
While the online-portal and media giant is slated to release its second-quarter earnings report after the close today, all that may be overshadowed by the sale of its internet business.
Yahoo began exploring “strategic alternatives” at the beginning of the year, and the company’s core internet business has been on the auction block for months. Yahoo stock has risen over 13% in 2016 as a result.
Currently, the leading bidders include Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T), alongside a few private-equity firms. Analysts are expecting an announcement on a potential deal today, or around the company’s earnings report or conference call.
As for earnings, Wall Street is expecting a profit of 10 cents per share, down from 16 cents per share in the year-ago quarter. Revenue is seen falling 13.4% to $1.08 billion. What’s more, speculators are playing it safe on Yahoo this quarter, as EarningsWhisper.com places the whisper number in line with the consensus estimate.
However, bullish sentiment remains thick within the brokerage community for Yahoo stock. According to data from Zacks, YHOO has attracted 17 buy ratings, compared to nine holds and no sell ratings. What’s more, the 12-month consensus price target of $40.97 represents a premium of about 8.6%.
Options traders, meanwhile, are clearly looking for arbitrage following a Yahoo sale. Specifically, the July/August put/call open interest ratio for Yahoo stock currently stands at an impressively low reading of 0.38 — with calls nearly tripling puts among options set to expire within the next two months.
Click to Enlarge However, when we zero in on just the weekly July 22 series, that put/call OI ratio surges to a perch of 1.11. These weekly puts are most likely protection against downside earnings fallout, while August series calls are likely arbitrage for the Yahoo sale.
Surprisingly, implieds are relatively tame for YHOO this week. Overall, weekly July 22 series implieds are pricing in a potential post-earnings-or-sale move of only about 4.6%. This places the upper bound at $39.76, while the lower bound lies at $36.24.
2 Trades for YHOO Stock
Strangle: With volatility somewhat low for everything YHOO is facing this week, there is plenty of potential in a strangle play. A strangle involves the simultaneous purchase of an out-of-the-money call and an out-of-the-money put (with both strikes typically just above and below the stock’s current price), and allows the trader to take advantage of a large move in the underlying stock regardless of the direction.
In other words, if the sale or earnings fail to meet expectations, traders benefit on a crash in YHOO stock, while still holding upside exposure to any positive reaction should earnings beat or a sale figure come in higher than expected.
At last check, the YHOO August $37.50/$38 strangle was offered at $1.33, or $133 per pair of contracts. Breakeven for this trade lies at $39.33 on the upside and at $36.17 on the downside.
Call Spread: With high expectations for a sale, traders might want to jump on the bullish bandwagon this week. Solid earnings could provide additional fuel for Yahoo stock’s current rally, while any news of a sale could also create a strong upside move. Those looking to bet bullish on Yahoo stock might want to consider an August $38/$40 bull call spread.
At last check, this spread was offered at 75 cents, or $75 per pair of contracts. Breakeven lies at $38.75, while a maximum profit of $1.25, or $125 per pair of contracts, is possible if YHOO closes at or above $40 when August options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
