Playing the Expiry for May 21: Yahoo!

Shares of Yahoo! [YHOO:NDQ] have taken a turn for the worse as controversy lingers in regards to a transfer of payment from Alibaba. The stock has plummeted from just under $19 to about $16.25 currently in a week. The stock is now trading near a medium-term support at $16. The massive support has held at least five times prior, with a few minor dips into the $15.xx trading range only to be pushed back up above (see chart below).


Chart courtesy BigCharts.com

There are two ways one can play this trade. Personally, I would rather look at writing the put options. The May21 put option at a strike of $16 (this is the regular monthly option as well), are bidding about 22 cents. The premium received represents 1.35 per cent income against the value of the stock and protection on a drop of 2.89 per cent or less.

Another trade consideration would be to buy the call. I normally buy at- or in-the-money options, never out-of-the-money. The current time value on the options for May is relatively small against the volatility of the stock. Expect to pay 20 cents of time value for the remaining four and a half days on the May $16 calls. The current price is 47 cents.

Based on the chart patterns, if the stock were to drop below $16 by Friday, consider taking assignment and wait for the stock to push back above $16. However, any change in fundamentals related to the Alibaba payment could create volatility downwards (or hopefully upwards).

Note, normally I take a position and then post it on my blog, however, due to my uncertainty on the outcome, I have no position at the moment. The technical pattern looks promising, but due to the underlying issue with Alibaba, I have decided to wait a few more days.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.