Shares of
Yahoo! (NASDAQ: YHOO )
are roughly 7% off their 52-week high of $18.01 reached in
mid-October. Shares of the internet firm are up more than 9% since
the beginning of March. A look at some call buying might suggest an
investors placed a bet on later-term upside.
Around 10 a.m. EST on Wednesday morning, an investor purchased
16,500 January 2012 20 strike calls versus current open interest of
15,030 contracts. The investors paid $1.60 per contract for the
calls when the stock was trading around $16.92 a share. I like to
use my
virtual trading account
to look at the profit and loss potential for trades like this long
call.
At first glance, this trade appears very bullish; it probably
is. But a closer look shows that these options traded with stock,
meaning that the call buyer simultaneously sold shares to the
option market makers. A look at the time and sales in YHOO shows
that more than 690,000 shares traded at $16.92 around the time of
the option trade. 690,000 is roughly the number of shares that
market makers would need to buy to make this trade delta neutral.
The fact that the investor executed a delta-neutral trade could
mean that they are more interested in betting on volatility than
direction. The $1.60 premium in the calls with stock at $16.92 is
an implied volatility of 28.5%. The realized volatility for the
last three months is 24%. If this investor thinks that YHOO will
become more volatile, then purchasing options on an implied
volatility of roughly 28% will make money for the investor if they
are hedged daily until expiration.
It is more likely that this trade is still bullish because the
investor has sold the stock to the option market makers to control
the price jump in the stock caused by the market makers buying the
stock in the open market. By doing so, the investor has managed to
only purchase volatility from the market makers rather than delta.
This enables the investor to get a cheaper options price because
the option market makers do not have to take stock price risk at
the time of the option sale. This action allows the investor to
keep the purchase of the stock more anonymous. The investor may
have bought the stock in the market prior to buying the calls
hoping that the price paid for the shares will be less than what
would be implied in the option price. The investor then sells the
stock to the market makers and is left with the long calls.