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Yahoo Options: The Earnings Post Game Trade

Cheap volatility plus some explosive earnings reports have created opportunities in the options market this quarter—a 'buy the rumor, sell the news' kind of strategy.

Every pundits favorite stock, Apple rocked its quarter Tuesday, sending the stock up over 6.2 percent and trading well over a quarter of a million "weekly" calls on Wednesday, according to Think or Swim data.

But what if a stock doesn't react to earnings, and trades basically unchanged, with low volatility? Enter Yahoo and the counter-trade.

J.P. Morgan equity derivatives team is suggesting, in a report, a post earnings trade for options on shares of Yahoo .The company also reported its earnings Tuesday, but those earnings were roughly in line with analyst’s expectations and the stock barely budged.

According to the report, J.P. Morgan ranks Yahoo 'number 1' in its “one month range bound report.” They suggested it presents an attractive opportunity to sell both puts and calls or in other words, a strangle.

“Earnings were the catalyst and that is out of the way”, says Amyn Bharwani, J.P. Morgan U.S. Equity Derivatives Strategist.

And despite talk of a prospective deal for the company now that co-founder Jerry Yang has departed, Bharwani does not expect any offer in the near term. “Up to March we think it (Yahoo) will trade in a range”, he says. J.P. Morgan rates the stock “neutral” with a price target of $17.

Bharwani is recommending investors sell the $15-$17 strangle expiring March, 2012 for about $0.77. Two-month at the money implied volatility for Yahoo is roughly 36 percent, while realized volatility is closer to 21 percent for one-month and 28 percent for 3-month volatility. The implied volatility premium to realized volatility makes this an attractive trade, he writes.

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