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Traders Expect Downside in Yahoo

Intermediate-term put options popular among Yahoo bears


Yahoo AlibabaYahoo (NASDAQ:YHOO) shares outperformed the market Wednesday, rising 1.4% versus a 0.6% bounce in the S&P 500. The stock gained ground even amid reports that the company’s senior VP of product management is leaving after about 18 months with the company.

Despite this move (or perhaps because of it), option traders turned their attention toward put options. Of the 55,000 contracts that traded during the session, 30,000 were on the put side.

More than 19,000 of these puts traded at the July 12 strike, including a block of 10,000 contracts that went off at the ask price. Given the existing open interest of just 12,500 contracts, it appears that these puts were bought to open for 29 cents per contract, or $290,000 for the 10,000-contract lot.

Two very interesting things about this option. First, it is out of the money by roughly 18%, meaning the put buyers are expecting some pretty steep downside between now and July expiration. Which brings us to the second notable point: The options won’t expire for 135 days.

There might be two earnings reports between now and then; YHOO is expected to report its first-quarter earnings on or around April 17. And last year, second-quarter earnings were released on Tuesday, July 19. July options expiration this year is on July 20.

So there is a lot of time for YHOO to make this rather sizable move, but it is a risky venture nonetheless. The delta on this put option is currently 15, which means the option will gain 15 cents for every $1 decline in YHOO shares. The delta also can be viewed as the percent chance (15%) the option has of being in the money by expiration.

The technical picture on Yahoo has been an interesting one. Going back to the fall of 2010, YHOO shares have had a love/hate relationship with the $16 level. From October 2010 through May 2011, this level acted as support on all pullbacks. In fact, YHOO seemed content to sashay sideways atop this level.

Then in mid-2011, shares came crashing through this former support zone, ultimately bottoming out around $11.10 in early August. While YHOO shares have recovered nicely from this crash, they have yet to make a solid break above resistance at $16.

Weekly Chart of Yahoo (YHOO) since September 2010
Click to Enlarge
But while the YHOO put buyers might be skeptical about any possibility of upside in the shares, it is curious that they would buy a put that is so far below the current stock price. After all, YHOO hasn’t traded below the $12 level in roughly seven months.

The most the trader can lose is 100% of the premium paid, or 29 cents per contract. Gains are unlimited down to zero if YHOO retreats lower, and breakeven is $11.71, or the strike price less the premium paid.

Do you think this bearish play is warranted? Let us know your YHOO outlook in the comments section.

As of this writing, Beth Gaston Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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