Yahoo Offers Strong Value at $25
Posted on Wed 14th Nov, 2007 02:52:06 PM
Direct your focus to Yahoo (YHOO). The shares are down from a recent high of 32 after the tech sell-off last week. At $25.30, writing the Dec strike 25 calls are a great hedge against the underlying shares to safeguard further downside. You pocket literally an intrinsic value of 1.60/share on the hedge. Thereafter, the shares will be a good buy and hold regardless if they’re below or above 25 by Dec expiration. The shares will be a very good candidate for the following strike of 25 for months.
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Yahoo is a very tough one to call right now. Google has certainly been beating up on Yahoo and is actually still cheaper on a peg basis. I want to wait to see that Yahoo is getting its growth back before buying in.
Aaron, I concur with your concern regarding the competition that YHOO faces from GOOG. However, YHOO at 25/share hedged against the Dec strike 25 calls offers great downside protection. As the calls decay in time value come the 3rd week of Dec (expiration), the underlying shares’ downside value is preserved by nearly 1.65/share! By then, you can roll the Dec calls into the January which would most likely be worth about 1.4/call and be termed “at the money” calls. The beauty of “at the money” calls is that they dont place a cap on your gains, should the shares sure.
All in all, buying shares and writing calls against them offer a great hedge strategy. I have employed this system for years and have prospered well. I will post other strategic plays on other stocks as more opportunites arise.
I’m a little new to the whole options game. Are you suggesting to buy the underlying stock? Or buying Dec Strike 25 calls?
You would buy the shares and simultaneously write the calls. To write the calls, you would sellect “sell to open.” When you cover, you sellect “Buy to cover.”
Please be advised that if you have not done this strategy in the past, I discourage you from placing real capital. You might want to experience it first with hypothertical trading.