Wednesday, August 1, 2012

YHOO: Trading a raggedy range

Most people don't think of Yahoo! Inc. (YHOO) as their first choice when it comes to the daily task of searching for stuff. It's the kind of company where my first thought is, "It was a big deal in its day".

Yahoo!, of course, is still a big deal: A large-cap company worth $19.6 billion on the market with its fingers in all sorts of global information pies.

Yet it's not anybody's idea of a hot stock. Return on equity is a mere 9%, earnings are all over the map, and the company has been going through CEOs like Larry King goes through wives. The former radio and CNN TV interviewer is listed in Wikipedia as having married eight times. Yahoo! has seen eight CEOs since 1995, four of them this year alone.

YHOO is trading at the upper edge of a range that has been in place since September 2011, running roughly from $14.75 to $16.50, with short-lived breakouts to either side.

Viewed more narrowly, YHOO is in an uptrend from the March 13 opening at $14.54. It's very messy uptrend, one that inspires little confidence in the momentum of the price. Analysts have no enthusiasm for the stock, giving it an enthusiasm index of negative 54%, unchanged from a month earlier.

Why even look at Yahoo!? Two reasons: 1) It's a major player that produces a fair share of financial news in the Internet sector, and 2) it will either break above its range or reverse, and there's money to be made trading either way.

The range ceiling is raggedy. I think the best focus is a spike on June 26 up to $16.35 that was immediately reversed, causing the stock to close that day at $15.35. That's a huge intra-day range, and one that I would treat as significant.

So I see a break above $16.35 as being a signal to open a bull position.

Looking more minutely, YHOO on July 27 hit a high of $16.17 which it immediately pulled back from. It opened the next day at $16.15 and declined steadily from that level throughout the day. So a persistent break above $16.17 would certain look to be the start of some upside momentum.

July 31 and Aug. 1 bounced a few cents above $15.80. A move below $15.80 would suggest a retrenchment back toward the sidewinder floor, appropriate for a bear play.

Despite Yahoo!'s corporate governance issues, the company is very light on long-term debt, which amounts to only 1% of equity.

Institutions own 66% of shares, and the price has been bid up to where it takes $3.89 in shares to control a dollar in sales. That sort of bid up unsupported by the finances is a two-edged sword: I can see it as meaning the stock is too expensive to bother with, or I can judge it as a  indicator that a lot of money out there has a positive view of YHOO's prospects, whatever the analysts might say.

YHOO on average trades 14.6 million shares a day and so has a fine selection of option strike prices with high open interest and narrow bid/ask spreads. It's suitable for a wide range of option strategies.

Implied volatility stands at 25%, near the bottom of the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $14.83 and $17.15 over the next month.

Options on Aug. 1 were trading at 88% of their five-day average volume, with puts having 90 percentage point advantage, at 152% of the average volume.

YHOO closed Aug. 1 near the middle of that day's fair-price zone, which encompassed 98.2% of trades surrounding the most traded prices, $15.98 and $15.99.

Yahoo! next publishes earnings on Oct. 18.

Decision for my account: Odds are good that I won't trade YHOO. I want to keep my speculative money out for the next couple of weeks as I figure out my strategy for September diagonal spreads.

If I were trading, I would look to the breakout and reversal levels that I discussed above: $16.17 for the start of a breakout, $15.80 for the start of a reversal.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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