Call Options Or Put Options On Yahoo (YHOO)?
Yahoo (YHOO) provides search, content, and communication tools on the Web and for mobile devices. We’ve all seen the Yahoo homepage, it’s one of the most regularly visited sites in the world. The company receives most of its revenue from advertising and advertising services.
YHOO currently trades for $23.79 per share, and has risen 20% year to date. The shares are up 63% from the 52-week low of $14.59, and they’re only 5% beneath the 52-week high of $24.99.
Is this an opportunity to buy call options on YHOO after the company’s earnings came in better than expected? Or should you buy put options on YHOO because of the surprise drop in ad revenue?
The bulls make a convincing argument…
YHOO earned $390 million in the first quarter, or $0.35 per share. That’s a large increase over last year’s $286 million, or $0.23 per share. Analysts had expected $0.25 per share on average.
For a company in the process of a turnaround, that’s clearly an impressive quarter.
The surprisingly higher profits came from investments in other companies, such as China’s Alibaba Group. In fact, investments earnings were $216 million for the quarter, or over half the profits. Cost cutting measures also contributed to the improvement to the bottom line.
But the bears have a compelling case as well…
YHOO’s core business didn’t perform as well as expected. Investors had been excited about the company’s turnaround prospects. However, this past quarter’s results show there’s still quite a ways to go.
You see, total revenue fell 7% year over year to $1.1 billion. More importantly, display ad revenues dropped 11% and search advertising revenues fell by 10%. That means the company is losing out to its competitors, such as Google (GOOG).
For a company in the midst of a turnaround, core business revenues are perhaps the most important factor. On this front, YHOO’s quarterly financials are a disappointment.
Is YHOO’s strong earnings news enough to overcome the drop in advertising revenues?
If you think the bulls are right, take a look at buying the YHOO June 2013 $24.00 calls for around $1.00.
If you think the bears are right, take a look at buying the YHOO June 2013 $24.00 puts for around $1.10.
Yours in Profit,
Gordon Lewis
Article originally published in Options Trading Research on April 17, 2013
Category: Options Trading
