Yahoo! Inc. (YHOO) Stock Will Rebound from Alibaba Group Holding Ltd (BABA) IPO Depression

Yahoo! Inc. (NASDAQ:YHOO)’s stock has not hit the ceiling and is likely to grow according to analysts, who describe its drop to close the week as a combination of various factors, not the least of which was as a hedge against Alibaba Group Holding Ltd (NYSE:BABA)’s IPO. The future of Yahoo! Inc. (NASDAQ:YHOO)‘s stock was discussed on CNBC, where analyst Dan Nathan, the Co-Founder and Editor of, discussed his options plays on it, which count on the stock making gains over the next six weeks.

Yahoo! Inc. (NASDAQ:YHOO)

“What I would do is, I would look out to November and I would buy a “call butterfly”. And when the stock was $40.60 today, I priced up the November $40, $45, $50 call butterfly, that cost a dollar. I was buying one of the November $40 calls for $3.20, selling two of the $45 calls at $1.30 each, that’s $2.70 total, and then buying the far wing, the November $50 call for about $0.50. It cost me a dollar, that is my maximum risk,” Nathan explained.

As Nathan explained, so long as the stock finishes in the $41 to $49 range by the options’ November expiration, his play will return $4 for the $1 invested. The call butterfly, also known as a butterfly spread or long call butterfly, is used when the stock isn’t expected to produce much volatility. In this particular case it provides a good deal of incentive for any trader who believes Yahoo! Inc. (NASDAQ:YHOO)’s stock has some room to the upside, even as much as 20%, as the play pays out in a range slightly above Yahoo! Inc. (NASDAQ:YHOO)’s Friday close of $40.93.

With a good deal of volatility potential in Alibaba Group Holding Ltd (NYSE:BABA)’s stock over the next week or two, it’s hard to pin down exactly where Yahoo! Inc. (NASDAQ:YHOO)’s value lies. At present it’s trading at below core value, which certainly suggests a move up will be in the cards if Alibaba Group Holding Ltd (NYSE:BABA)’s stock remains close to current levels, possibly into a more comfortable $45 mark right in the midst of the range.

While a lot can happen in six weeks and the wild card of a possible takeover has to be considered, such a butterfly spread appears to offer a fair chance of success at a four-to-one payoff.

Warren Buffett and BillionairesFree Report: Warren Buffett and 12 Billionaires Are Crazy About These 7 Stocks

Let Warren Buffett, David Einhorn, George Soros, and David Tepper WORK FOR YOU. If you want to beat the low cost index funds by an average of 6 percentage points per year look no further than Warren Buffett’s stock picks. That’s the margin Buffett’s stock picks outperformed the market since 2008. In this free report, Insider Monkey’s market beating research team identified 7 stocks Warren Buffett and 12 other billionaires are crazy about. CLICK HERE NOW for all the details.