Yahoo rally incites feeding frenzy

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Yahoo has been running higher, and the option paper is going through the roof.

Our Heat Seeker monitoring system has shown repeatedly bullish activity in the Internet stock, starting with the weekly 31 calls on Tuesday . Traders paid $0.32 to $0.45 with the shares down around $31. They doubled just hours later as YHOO pushed higher and have now more than quadrupled to more than $1.80!

The trades are continuing fast and furious today, pushing total volume in the company toward 360,000 contracts. Not only is that 7 times greater than average, but calls outnumber puts by a head-spinning 10-to-1 ratio.

"MASSIVE yahoo Jan 35 x 40 spread trades for about a buck," optionMONSTER co-founder Jon Najarian thundered on our premium InsideOptions Pro chat room halfway through the morning. He was referring to a huge trade expiring early next year that will earn roughly 400 percent if YHOO reaches $40 by the third Friday of 2014.

The shares were at $32.04 when the transaction hit, but pushed higher and are now up 4.82 percent to $32.85. He or she has effectively locked in $35 as an entry price and will have to exit for $40 if it reaches the top of that range. It only cost about $1 to control that $5 move. (See the discussion of vertical spreads in our Education section for more.)

YHOO appears to be entering the second phase of a monster run that began one year ago--about three months after hiring Marissa Meyer as its CEO. The rally marked an end to a bear market in a stock that had languished since the dot-com bubble broke more than a decade ago.

It paused between May and late August, consolidating on either side of $27, but now seems to have broken that resistance. The next key area looks to be the late 2005 peak of about $40--exactly the level targeted with today's call spread.

Other trades have been winners as well. Back on June 18 , Heat Seeker showed buying in the January 34 calls for about $0.70. Those shot up to more than $1 a month later and are now bid at $2.36. Then on July 23, the October 29-July 30 call spread was suggested for $0.35 during tradeMONSTER's closed-door Market Action webinar . It's now worth $0.80, and will inflate to a full $1 if YHOO remains above $30 for the next 3-1/2 weeks.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


This article appears in: Investing , Options

Referenced Stocks: YHOO

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