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