Options Action

Searching for Gains on Yahoo

The Yahoo logo is displayed in front of the Yahoo headqarters in Sunnyvale, California.
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This is a Guest Blog from CNBC Contributor Brian Stutland.

Yahoo reported earnings after the close on Monday, and fell 3 percent in Tuesday's trading. Revenue and profit per share beat expectations, but guidance was slightly below expectations (Read More: Yahoo Earnings Beat; Revenue Outlook Is Light.)

Nonetheless, one option trader used the stock's weakness to sell 4000 July 19-strike puts for $0.91 each, with the stock at $19.74. This trade suggests that the trader is willing to buy Yahoo at an effective price of $18.09 (8 percent lower) in July, and is happy to collect $0.91 (a 5 percent return on capital) if Yahoo is above $19 at July expiration.

The Yahoo earnings report was full of mixed news.

On one hand, the company did beat expectations, posted lower TAC ("Traffic Acquisition Costs"), and improved search revenue and paid clicks by 11 percent year-over-year. However, guidance was weaker than expected, and display advertising revenue was disappointing.

Yahoo's Q4 Earnings Beat
Yahoo's Q4 Earnings Beat

Going forward, the key for Yahoo will be to do a better job of engaging visitors on its sites. This will drive display ad growth, which is traditionally Yahoo's bread and butter. Search advertising was surprisingly strong, and investors should look for this growth to continue, which will help to offset the structural decline of the display ad market.

The big question that remains is this: Can CEO Marissa Meyer and the Yahoo management team revitalizes Yahoo and drive growth? Their goal is to achieve higher user engagement by identifying products that create a daily digital habit with users, and to create products that appeal to a wider demographic. This is all easier said than done, and only time will tell whether Yahoo can deliver.

After the earning release, analysts all stuck to their recommendations, but most raised price targets slightly.

The outlook for Yahoo looks optimistic—but I, like the trader who put on this options trade, prefer to hold off on outright stock purchases for now.

Selling a put is a good alternative to buying shares here, because it will allow you to modestly participate in the upside the stock could see, and also locks in a future purchase price at a better valuation, should the stock stumble in the next six months.

Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."

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Disclosures: Stutland currently holds bull VIX futures and options positions for himself and clients, and his broker/dealer is a market maker holding hedged positions in VIX futures and options.

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