Yahoo shares are having a great week after the company strongly beat its third-quarter earnings expectations and on the revenue side. But one trader appears to believe that Yahoo's upside will be limited in the next month.
As Yahoo options traded twice their average daily volume on Tuesday, one trader sold 10,000 November 50-strike calls for 50 cents per share. Options experts say this trade was likely done against a long stock position, meaning that the firm will squeeze an extra 50 cent per share of yield out of Yahoo shares through the November expiration. However, the catch is that this trader is now compelled to sell those Yahoo shares for $50 at November expiration, even if they rise above that level—meaning that the trader risks missing out on upside gains.
"I suspect this is an overwriting position against a long stock position, where the trader's basically looking to take in 1 percent over the next six weeks or so," Dan Nathan of RiskReversal.com said on CNBC's "Fast Money."
But with Yahoo shares closing at $42 on Tuesday, "that breakeven is well above current levels, so that looks like a pretty safe premium sale over the next few weeks," he added.
Read More Expect more activism in Yahoo, says hedge funder
This trade appears to be part of a continued strategy for the firm, rather than a short-term tactical maneuver. While selling those calls, the trader also bought back 10,000 November 45-strike calls to close an existing position. After jumping more than $2 on Wednesday following Tuesday's earnings blowout, the stock is now getting mighty close to $45—so by rolling the position up to a higher strike price, the trader is reducing the chance of actually being forced to sell the shares.
