Yahoo stands to benefit from Alibaba's IPO in September, but traders aren't waiting to get long.
optionMONSTER's Heat Seeker monitoring program yesterday detected the purchase of 20,000 September 40 calls for $0.75 and the sale of an equal number of September 45 calls for $0.20. Volume surpassed the previous open interest in each strike, which indicates that new money was put to work.
Owning calls locks in the price where the Internet stock can be bought, while writing them obligates the investor to sell shares if they reach a certain level. Combining the two strategies controls the spread between the two prices and can result in significant leverage. (See our Education section)
In the case of yesterday's trade, known as a vertical spread , the investor paid $0.55 and will collect $5 if YHOO closes at $45 or higher on expiration in mid-September. That would be an 809 percent profit from a 25 percent move in the share price.
YHOO rose 2.58 percent to $36.60 yesterday and has been consolidating in a tight range since April. Although the company's last quarterly results missed estimates, the market is focused on its 24 percent stake in Chinese e-commerce giant Alibaba.
The initial public offering is scheduled for sometime in September, after many investors return from summer vacation. A strong IPO would likely drive YHOO higher.
Overall option volume in Yahoo was triple its daily average, with calls accounting for a bullish 74 percent of the total.
(A version of this post appeared on InsideOptions Pro yesterday.)
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