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Traders expect fireworks for Yahoo earnings

Yahoo is set to report earnings Tuesday after the bell, and some traders are betting that the search giant could be just the latest company to disappoint investors.

On Monday, when the stock was up 1 percent and options put volume ran 35 percent higher than its daily average, traders bought more than 3,000 of Jan. 30 weekly 46.50-strike puts for approximately 80 cents. The trade, which is profitable if Yahoo shares are below $45.70 or roughly 7.5 percent lower by Friday, is a one-week bet that the stock could sink to levels not seen since late October.

Whatever direction Yahoo trades Tuesday night, options traders are bracing for a big move after results. Current at the money put and call prices suggest the stock could move as much as 8 percent when it reports. Yahoo shares typically move around 5 percent on earnings.

Read MorePro has major beef with Yahoo's Mayer

"We didn't have a very busy day in the market," said MIchael Khouw, a CNBC contributor, referring to Monday's significantly light volume. "But we did see a lot of put buying in Yahoo ahead of earnings [Tuesday] afternoon."

Khouw noted that in addition to the 46.50 puts, the 45-strike puts that expire this Friday were also active, suggesting options traders are taking an overall bearish view on Tuesday's Yahoo earnings. When traders buy put contracts, they are buying the right to sell a stock within a set time and set price.

The bearish bets in the options pits came as Yahoo's torrid run has stalled of late. After gaining 33 percent in 2014 the stock is down more than 2 percent since 2015.

Added Khouw, "it's interesting because there was also bearish activity in Alibaba, which is also reporting this week."

The Alibaba Group logo is shown at the New York Stock Exchange during the company’s IPO, Sept. 19, 2014, in New York.
Adam Jeffery | CNBC
The Alibaba Group logo is shown at the New York Stock Exchange during the company’s IPO, Sept. 19, 2014, in New York.

Investors are expecting Yahoo CEO Marissa Mayer to address the company's massive state in the Chinese Internet giant, which is set to report earnings Thursday.

Read MoreYahoo's Mayer poised to decide on Alibaba stake

Wall Street is expecting Yahoo to have earned 29 cents per share and see $1.2 billion in revenue for the fourth quarter.

Disclosure: CNBC has a content-sharing partnership with Yahoo's finance site.

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