Yahoo! Inc.: Why You Should Go Contrarian on YHOO Options

It’s the start of another beautiful week and as usual, I am excited about the possibilities that options trades present this week. We start this week as we examine options of Yahoo! Inc. (NASDAQ:YHOO) with a view to making contrarian trades. Yahoo Inc. with its market capitalization of $40.40B is a key player in the provision of web-based services and advertisements.

We Might have Caught the Last Wave Already

I started coverage on YHOO options this year when I wrote a piece titled “The Real Reason Yahoo! Surged and How to Catch the Next Wave” in April. In that piece, I discussed Yahoo’s equity interests extensively and how the company has been recording profitability in its interests. I proceeded to recommend a straddle with the YHOO Oct 2017 37 Option.

5 months later, those that followed my recommendation in April will surely have caught that wave to profitability. As at April 16 when I wrote that piece, shares of Yahoo were trading around $33.93 apiece. However, as at 9:39AM EDT today shares of Yahoo were changing hands at $40.72 apiece to mark an upside of 20.04% in the share price.

Why Go Contrarian on Yahoo Now?

It would seem strange that I recommend going contrarian on Yahoo at a period when the company is recording a strong rally because of the upcoming Alibaba IPO. However, I believe option traders are mostly interested in making profits; otherwise, they would buy shares and obtain equity in companies. I strongly believe that contrarian trades will provide maximum benefits on Yahoo in the coming quarters as the reasons below show.

  • Alibaba’s Contribution to Earnings is Substantial

It is no longer news that Yahoo! has been staying above water lately due to the impressive success being recorded in Alibaba and not because of a fundamentally strong business. However, Alibaba’s IPO means that Yahoo will be left without much of the revenue that its Alibaba equity used to contribute. In fact, it is to be expected that investors will now start paying much attention to Yahoo’s core business, which is not doing very well as the next point explains.

  • Losing Market Share in Core Business to Competitors

Yahoo, which should have been the granddaddy of all companies in the web-based services business is actually lagging behind relatively newcomers Google and Facebook. To start with Search, it doesn’t take much analysis to deduce that Google is undoubtedly the market leader in Search while Yahoo and others share the market crumbs.

The Display Ad Market, which used to be Yahoo’s bread and butter, is being overrun by Google and Facebook. In addition, Yahoo has not been able to prove itself as a formidable competitor against Google in the Online Advertisement business.

The worst part is that Yahoo is practically a small player in the mobile search market. Mobile connectivity in all its form is becoming very popular in both developed and emerging economies but I cannot realistically see how Yahoo can break into this segment. For one, the iOS and Android OS, which are the most popular mobile OS in the United States come pre-installed with Google Search. In addition, most Chinese OEMs who produce low-budget smartphones for emerging markets use the Android OS and there goes another possible market for Yahoo.

How to Trade YHOO Options

Drawing inspiration from the Oracle of Omaha, I am choosing to be fearful on Yahoo as greed continues to drive the stock higher. I strongly believe that we will know the real worth of Yahoo in about 2 quarters from now when the company delivers earnings net Alibaba’s contribution. I recommend buying put options and the YHOO Mar 2015 32.000 put (YHOO150320P00032000) looks attractive at an asking price of $0.85.

 

— Daily Option Alerts

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