Call Options Or Put Options On Yahoo (YHOO)?

| April 16, 2014 | 0 Comments

yahooAs we approach the heart of earnings season, we’re starting to get to some of the more interesting companies.  In fact, last night brought the highly anticipated release of Yahoo’s (YHOO) quarterly results.

YHOO shares are trading at $36.50, up nearly 7% today.  The stock’s up 61% from the 52-week low of $22.70 and is 12% below the 52-week high of $41.72.

Is this an opportunity to buy call options on YHOO because the company beat earnings expectations?  Or should you buy put options on YHOO due to the upcoming Alibaba IPO?

The bulls make a convincing argument…

YHOO posted better than expected earnings and revenues compared to what Wall Street analysts had expected.  Most importantly, the company’s core business of display ad revenues showed growth.

Earnings came in at 38 cents a share, compared to the 37 cents consensus estimate.  The company generated $1.09 billion in revenues, while the average estimate was $1.08 billion.  Finally, display ad revenue increased 2% year over year to $409 million.

What’s more, search revenues climbed 9% from last year, marking the ninth consecutive quarter of growth.  Basically, YHOO showed growth in all the right areas, and certainly looks to have momentum.

But the bears have a compelling case as well… 

Much of YHOO’s growth is related to its stake in Alibaba.  The Chinese Internet giant showed 66% growth in 4th quarter revenue.  Keep in mind, YHOO holds a 24% stake in the company.

While that’s a good thing for now, Alibaba plans to have an IPO in the near future.  Once the company goes public, YHOO will most likely look to liquidate shares and collect the proceeds.

However, much of that liquidation value is built into the stock price.  Once the company sells out its stake, its strong growth numbers could take a serious hit.  Will investors still want to buy YHOO without Alibaba?

So are better than expected earnings a reason to go bullish on YHOO, or is the upcoming Alibaba IPO a reason for concern?

If you think the bulls are right, take a look at buying the YHOO June $36 calls for around $2.25.

If you think the bears are right, take a look at buying the YHOO June $36 puts for around $2.00.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.