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The Longs and Shorts of Yahoo’s Alibaba Deal

2 options plays for the short and long term


By now, you’ve surely read all about how Alibaba Group Holding Ltd. agreed to buy back about half of Yahoo‘s (NASDAQ:YHOO) 40% stake in the company for roughly $7.1 billion in cash and preferred stock.

On the surface, the deal appears to put much-needed cash back in Yahoo’s depleted coffers. However, CFO Tim Morse told investors during a conference call on Monday that the company would net only $4.2 after taxes, and that it would return “substantially all” of that to shareholders.

There are two important factors swirling around in this maelstrom to which Yahoo traders should pay close attention. Long-term investors will note that while this deal solves a contentious relationship between Alibaba and Yahoo, it does not remedy the company’s declining relevance and presence on the Internet. Short-term traders, meanwhile, will have picked up on the fact that Yahoo has boosted its share buyback plan by a whopping $5 billion as part of the Alibaba deal.

The implications of Yahoo’s predicament have not been lost on the options crowd. Optimism is rife in the June and July option series, with put/call open interest ratios arriving at 0.48 and 0.39, respectively. In other words, calls more than double puts in the front two months of options, with traders banking on the Alibaba news and share buyback plan to provide a short-term boost.

Looking ahead to the October series, however, reveals an entirely different sentiment backdrop. Specifically, the put/call open interest ratio for October arrives at 0.95, with calls and puts in near parity. In other words, traders with a longer-term outlook for Yahoo are expressing a considerable degree of uncertainty compared to options traders in the June and July series.

For comparison, YHOO’s total put/call open interest ratio rests at 0.52, further highlighting the bullish activity in the June and July series, as well as the comparatively bearish activity in the October series. Taking clues from this options backdrop unveils a pair of potential trading strategies.

From a long-term perspective, YHOO still is facing a significant uphill battle. Technically, the shares are down more than 18% since peaking near $19 in May 2011. With no real compelling answers to increasing competition from Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB), YHOO appears destined to continue this slide once the shine of the Alibaba deal wears off. As such, traders with a longer-term outlook might want to consider an October 13/15 bear put spread.

This spread was offered at 71 cents, or $71 per pair of contracts, at the close of trading on Tuesday. Breakeven lies at $14.29 — a decline of 6.5% from yesterday’s close — while a maximum profit of $1.29, or $129 per pair of contracts, is possible if YHOO closes at or below $13 when October options expire.

From a short-term perspective, YHOO still is enjoying a bit of a boost from the Alibaba deal, as well as news of the company’s new and improved share buyback plan. The $15 area looks like a prime area for a potential short-term rebound, especially with YHOO’s 200-day moving average rising through the area. Following the bullish trend of June options traders, a June 15/16 bull call spread has plenty of potential.

This bullish spread was offered at 48 cents, or $48 per pair of contracts, at the close on Tuesday. Breakeven lies at $15.48 — a gain of 1.2% from yesterday’s close — while the maximum profit comes in at 52 cents, or $52 per pair of contracts, if YHOO closes at or above $16 when June options expire.

As of this writing, Joe Hargett did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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