Yahoo! Inc. (NASDAQ: YHOO) shares are trading higher today after the company announced this morning that it has signed an online content deal with Sony BMG, a subsidiary of Sony Corporation (NYSE: SNE). The deal would allow people to upload files with music or video content by Sony BMG artists to Yahoo. Financial terms of the deal were not disclosed, but YHOO said that Sony BMG would receive a cut of advertising revenue. If you think that Yahoo!, won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on the stock.After hitting a one-year high of $34.08 in October, the stock has declined over the past month. YHOO opened this morning at $26.93. So far today the stock has hit a low of $26.85 and a high of $27.25. As of 11:05, YHOO is trading at $27.09, up 35 cents (1.3%). The chart for YHOO looks bullish but deteriorating, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $22.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 12.1% return in just 9 weeks as long as YHOO is above $22.50 at January expiration. Yahoo! would have to fall by more than 17% before we would start to lose money.
YHOO hasn't been below $22.50 by more than a few cents in the past year and has shown support around $25 recently. This trade could be risky if Google (NASDAQ: GOOG) continues to take market share away from Yahoo!, but even if that happens, this position could be protected by strong support the stock formed around $22.50 when it bottomed at that level back in July, August, and September.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in YHOO, SNE, or GOOG.
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