Yahoo! (YHOO) - Elevated Vol, Takeover Still In Play

YHOO is trading $16.43, down 0.8% with IV30™ down 0.8%. The LIVEVOL™ Pro Summary is below.



I found this stock using a real-time custom scan. This one hunts for high vols. I wrote about YHOO on 11-15-2010:
Yahoo (YHOO) - Elevated Vol Rising

And on 11-9-2010:
Yahoo (YHOO) - Takeover Rumors Push Vol and Skew

Custom Scan Details
Stock Price >= $7 and <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 and <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching. The YHOO Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

 

We can see:
IV30™: ~39.46
HV20™: 27.32
HV180™: 31.24

So, IV30™ is elevated relative to the short term and long term realized movement of the stock. The risk here for YHOO is to the upside as reflected by the options. Let's look to the Skew Tab for Dec.



So substantially bid to the upside which is the opposite of "normal." To read about Option Skew, why it exists and what "normal" is, you can click here:
Understanding Option Skew

Let's look to the Options Tab (below).



Possible Trades to Analyze
1. Selling the vol naked is a possibility, though risky with the takeover possibility, or even more likely, the risk of a takeover rumor. Having said that, a Dec 16 straddle sale @ $1.25 yields some premium to play with.

2. Sell the Dec straddle to purchase 2 Dec 17 calls and 1 Dec 18 call for $1.21, or a net $0.04 credit. Or, in other words, buy the takeover "bet" and cover commissions while taking on downside risk. I don't love this trade, but I do like the sentiment... Try this...

3. Sell the Dec 16/17 strangle @ $0.86, purchase 5 Dec 19 calls for $0.17 or $0.85 total. This yields a net premium of $0.01, and gives a huge win if YHOO gets the takeover bid for $20 or above. But, if YHOO trends up to $18-$19 and sticks, this trade is a big loser.

4. Sell the Dec 16/17 strangle @ $0.86 and purchase 2 Dec 18 calls for $0.54. This yields a $0.32 credit and wins to a takeover while trimming the upside risk if YHOO pins to the long strike.

NB: All of the trades above ignore downside risk... This was a $14.43 stock just a few weeks ago, so, ya know, downside is in play too.

This is trade analysis, not a recommendation.

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