Yahoo! (YHOO) call action rolls down

By Jud Pyle, CFA,

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Without any notable news from Yahoo! Inc. (NASDAQ: YHOO ) , shares of the Internet company are on the rise today. At least one investor appears to have rolled down a long call position. This options action maintains bullishness but scales back the upside bet.

YHOO shares closed up 19 cents to $14.59 on Thursday. The stock is trading 6% off its 52-week low of $13.75 and roughly 23% off its' 52-week high of roughly $19 (reached in April). YHOO is scheduled to announce earnings figures on July 20 after the market closes, and analysts estimate earnings of 14 cents a share. Call volume on the tape suggests one investor expects the stock to be trading slightly higher than its current level at January 2011 options expiration.

At 11:34 a.m. EST, a block of 5,000 January 2011 14 calls changed hands for $1.92 per contract, which was the ask price at the time of this trade. At the same time, the same number of January 17.5 calls changed hands for 58 cents per contract, which was one cent below the bid price when the volume hit the tape. The lower-strike calls are home to current open interest of 419 contracts while current open interest of the higher-strike calls is 82,000 contracts. It looks like an investor sold to close the January 17.5 calls and simultaneously bought to open the January 14 calls to maintain bullish exposure to the stock but rolled down to a lower strike betting the stock will not climb as much as the original long position called for. Investors will make money on this roll if YHOO shares are trading higher than $15.34, and could theoretically make unlimited gains if the stock continues to the upside. If YHOO shares drop below the strike price and are trading lower than $14 at expiration, the investor loses the entire premium paid per roll.

The January 14 calls are trading at an implied volatility of 36% compared to the stock's 30-day historical volatility of 28%. You can assess implied volatility levels and create visuals of risk/reward dynamics of this call roll and other stock and option plays by opening a free virtual trading account today.

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

This article appears in: Investing Options
Referenced Stocks: YHOO

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