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A Yahoo Straddle Plays on Volatility

Options trade predicts a moving stock will drive profits


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 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). 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 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.”

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