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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (40991)	4/8/2004 4:02:33 AM
From: Johnny Canuck	Read Replies (1) \| Respond to of 70658

Is Yahoo! Doomed to Repeat Past Patterns? Al Schwartz (aschwartz@sir-inc.com) 4/7/2004 2:20 PM ET Email to a Friend Print This Page Add Headlines to your News Aggregator I must admit that as I started digging for information on this piece, I caught myself attempting to form an opinion (a bearish one I might add) on the fate of the shares before all of the pieces could be assembled. First, it seems almost blatantly obvious that Yahoo! (YHOO: sentiment, chart, options) almost always rallies into its earnings release only to be greeted by selling. You could almost feel expectations heading into the earnings report heighten with every advance in the shares. The company last reported earnings after the market close on January 14. The shares had found support in the 40 area and were ramping up into the report, peaking at 50.41 the day before the release. The company matched fourth-quarter expectations with a profit of 11 cents per shares on revenue of $663.9 million. Heading into the report, options pricing (implied volatilities) indicated an expected 2.79-percent move in the shares in response to the earnings release. The shares reacted lower, dropping 0.62 percent by the close of the next session. Fast forwarding to present time, the shares have found support in the 42 area in mid-March and advanced as high as 50.99 just three trading sessions ago (deja vu all over again?). Piece one of the puzzle now booked. Standing out in yesterday's option activity was the 10,401 contracts that changed hands at the April 50 call. Out of that huge amount of volume, just 2,841 new positions were added. On a percentage basis, there were more traders adding to the April 45 put, which had volume of 3,326 contracts translate into 1,492 fresh bearish bets (45 percent of the volume translated). Irrespective, the April 50 call overhead is still the option possessing the greatest amount of open interest with 25,735 contracts. Open interest in this option alone accounts for almost 25 percent of a single trading session's volume. Should the share approach this strike quickly enough, we could see a hedging rally (for an illustration of the mechanics of this phenomenon, see " Hedge Your Bets- A Discussion on Delta Hedging "). The opposite is also true. Should the share react adversely, unwinding of any hedged positions linked to this April 50 call could drive the shares inordinately lower. While we are on the topic of options, it might be worthwhile to note that the Schaeffer's put/call open interest ratio (SOIR) has attempted to establish a trend higher, as bearish put positions are opening at a faster clip than their bullishly-orientated call counterparts. Additionally, the two chart below show an eerily similar open interest configuration between the prior report and today's release. The price levels are also in the same area, making a comparison fairly straight fourth. A slight difference at this point in time is what sort of move options are pricing in. Recall from above we said that the options implied volatilities were expecting a 2.79-percent move in the shares and got a 0.62 percent decline. This time options are priced for a 3.14-percent move in the share price. Now keep in mind that implied volatilities do not indicate a direction, just the potential for that size of that move (in either direction). One item that is quite dissimilar is the amount of short interest that has accumulated on the shares. For the last report, short interest stood at 31.8 million, which would have taken 2.85 session to cover. This time around the short position stands at 48.0 million, which would require 4.59 days to cover. Combine this short interest with the call accumulation around that April 50 strike and a positive reaction to the earning report could go quite high. One point of concern to the bullish argument is the fact that the Street has become more enchanted with the shares over the past few months. According to Zacks, 80 percent of the 30 analysts offering an opinion have done so with a "buy" or better on the shares. The remaining 20 percent maintain a "hold" rating. So far in the option pit today, the April 45 put and April 50 call are receiving the brunt of investor attention. Once again, the April 45 put traded 6,758 contracts in volume on open interest of 15,234, while the April 50 call has traded 3,457 contracts on current open interest of 25,735. It appears that those late to the party are indeed casting bearish votes. Maybe this time the stock will buck the trend, but you be the judge now that the pieces have been presented. Al Schwartz (aschwartz@sir-inc.com) Schaeffer's Investment Research's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. We call this Expectational Analysis®. Click here for details.