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 RiskReversal.com, discussed his options plays on it, which count on the stock making gains over the next six weeks.
“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.
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