Yahoo (YHOO, $21.40, down $0.27) announced earnings after the closing bell yesterday and in after-hours trading the stock held up well. For Q2, the company reported earnings of $131 million, or $0.09 a share. This was a drop from $161 million, or $0.11 a share, in the year-earlier quarter. Wall Street was expecting $0.11-$0.12. Basically they missed by two or three pennies depending on who you talk with.

Some are saying the results were disappointing while others are saying Yahoo is getting a break because it could have been worse. The fact that the company did not change its full-year forecast is probably the silver lining that is holding the stock up.

That’s not really much to go on though. It’s amazing that Wall Street is so critical on some companies while giving others a kitchen pass. Yahoo gave a range so wide that you could drive a tank through it when it kept its full-year forecast in the $7.35 billion to $7.85 billion range, sorta.

The way this really went down was that Yahoo raised the bottom end of its previous revenue outlook to $7.35 billion but lowered its top end to $7.85 billion. The earlier forecast was even wider as it called for $7.2-$8 billion. How’s that for smoke-and-mirrors?

The wild card is Yahoo’s relationship with Google (GOOG, $477.11, up $8.31) which could add up to $800 million in revenue. But even that is still under regulatory review. Yahoo shareholders have suffered enough and their earnings report has more holes in it than a slice of swiss cheese. Still, the stock got some love and was up $0.59 to $21.99 in after-hours trading.

Rick Rouse
Rick@OptionsMentoring.com

Yahoo (YHOO, $23.91, up $2.56) put in another big day as talks with Microsoft (MSFT, $26.03, up $0.05) heated up once again. Microsoft is now on board with Carl Icahn’s plan to oust Yahoo’s board and said if that were to happen the company would renew its bid for Yahoo. Yahoo’s options were heavily traded as you would expect and I’ve been flooded with emails on what this all means. Well, I’m going to try and simplify it as best I can based from my point of view. First, let’s take a look at some options. Quotes are from Monday’s close with the percentage gain following:

July 22.50 call (YHQGX, $1.96, up $1.26) 180%
July 25 call (YHQGE, $0.69, up $0.40) 138%

August 22.50 call (YHQHX, $2.95, up $1.41) 92%
August 25 call (YHQHE, $1.65, up $0.79) 92%

For beginning option traders, notice the difference of return on the near-term July options compared to the return for the August options. I wanted to point this out so you can see how options react. The July options expire in 10 days while the August options expire in 38 days. Although the strike prices are the same, the difference between the July and August calls is the time premium. That’s another subject (one we teach in our Option Mentoring courses) too long to tackle in a blog but hopefully you get the idea.

Yahoo has been on a roller-coaster ride since Microsoft announced its bid for the company. There is a ton of action in Yahoo right now and has been for quite some time. However, if you are wrong on either side of the trade, Yahoo can cost you a bunch of money in a hurry.

I was asked the question the other day, “what do you think will happen with Yahoo and what is the “best” way to play it”. I pondered the thought and showed someone who has never traded options the difference in buying the stock and buying an option. It was last Thursday and I pointed out these same four options to them.

I said to buy 100 shares of Yahoo would cost you about $2,200. To buy an option contract for the July 25 calls would have cost about $30 per contract. I told them they could control 7,000 shares of Yahoo for the same price. Each option contract controls 100 shares and they could have bought 70 option contracts for $2,100. As of yesterday’s close, those same option contracts are now worth $4,900.

That sounds exciting right? The flip side of that is if Microsoft would have said over the weekend that a deal was off (again). Remember, we’ve been through this how many times now? Exactly. Over the past few months, Yahoo has been up and down more than Robert Downey Jr. can count and there’s no telling if these current talks will materialize or not.

Back to my story. The bottom line is that I told them if they expected Yahoo would get bought for $30 or higher then the July or August 25 calls would be like playing the lottery. If Yahoo doesn’t get bought and the stock doesn’t recover to $30-$31 then they just blew some money on a Pick 3 number that didn’t hit. It’s as simple as that.

Rick Rouse
Rick@OptionsMentoring.com

1:10PM EST

It looks like Microsoft (MSFT, $27.82, down $0.15) and Yahoo (YHOO, $22.43, up $0.98) are crying “wolf” again. Yahoo was getting spanked earlier in the session after a downgrade out of Thomas Weisel Partners. The stock was headed below $20 after the firm said Yahoo’s “outlook remains cloudy at best and potentially could worsen.” Well, it appears the sun came out quickly after the downgrade as reports have surfaced that both parties are back at the negotiating table.

Volume in the Yahoo July 22.50 calls (YHQGX, $0.80, up $0.03) is picking up steam and could easily double on the news. They were trading for 55 cents before the rumor broke. Be careful because there are conflicting reports saying there is no deal in place. The July 22.50 puts (YHQSX, $1.50, down $0.23) are also active and could get some heavy action as traders line up on both sides of the fence.

Rick Rouse
Rick@OptionsMentoring.com

Friday the 13th has been lucky for some, unlucky for others so far. Microsoft (MSFT, $29.32, up $1.08) and Google (GOOG, $5754.75, up $21.80) are trading higher while Yahoo (YHOO, $22.29, down $1.23) continues to get pounded. Microsoft and Yahoo failed at yet another attempt to get together forcing Yahoo to strike a deal with Google to sell search ads on its site.

The price targets and upgrades and downgrades on Yahoo and Google are in full force today but I’m not even going to mention them. I’ve mentioned that Google would ultimately be the big winner out of all of this and that appears to be the case. Microsoft’s bid reportedly was for $35 a share or $50 billion and it’s clear Yahoo just doesn’t want to merge with Microsoft.

The deal between Google and Yahoo was a big blow to Microsoft but it has once again created some interesting option plays. Yahoo fell 10% yesterday and the market is questioning the deal with Google. Yahoo is still trading above $19 which is where the stock was at before Microsoft made its original $45 billion offer, but far below the $33, now $35, a share Microsoft offered before finally leaving the table.

The deal Yahoo made with Google also leaves Carl Icahn in a pinch. The “corporate raider” had big plans to get Yahoo and Microsoft together but is now left with few apparent “options”. Remember, he owns 50 million shares of Yahoo at an average cost of about $25 a share. His losses are growing and he now stands to lose money if he can’t come up with another plan and decides to cut his losses.

I’m not sure where Yahoo goes from here but there seems to be some options traders buying the July 25 calls (YHQGE, $0.59, down $0.38) before the weekend in hopes of a quick trade and exit for next week. Yahoo had originally traded higher on the Google news last night and some are trying to play a possible small rebound in Yahoo. The Google July 610 calls (GOOGB, $12.90, up $3.80) are also getting some players.

Rick Rouse
Rick@OptionsMentoring.com

You really didn’t believe Microsoft (MSFT, $29.56, down $0.42) was totally “walking away” from Yahoo (YHOO, $27.85, up $0.19) did you? In case you haven’t heard, Microsoft has entered into discussions again about a deal with Yahoo. Although this doesn’t mean a full buyout is expected, Microsoft said it “reserves the right to reconsider that alternative depending on future developments and discussions.”

The timing of the announcement comes on the heels when many believe Yahoo is still trying to work out something with Google (GOOG, $583.71, up $3.64) perhaps as soon as this week. It is clear with the latest developments that Microsoft is trying to block a Yahoo/ Google partnership.

No doubt, things are heating up and Microsoft seems to be racing to the finish in its attempt to battle Google. It’s no surprise either that Yahoo’s call options are active today. The June 27.50 calls (YHQFY, $1.57, up $0.15) have traded over 18,000 contracts thus far and the June 30 calls (YHQFF, $0.52, up $0.08) have seen 14,000 contracts trade by lunchtime.

Rick Rouse
Rick@OptionsMentoring.com

It’s official, Carl Icahn confirmed he’s got a “team” in place for a proxy fight with Yahoo (YHOO, $26.98, down $0.18). It was revealed that Icahn acquired nearly 60 million shares of Yahoo stock over the past 10 days. Talk about a “Dream Team”, Icahn’s new board would include himself, Adam Dell (brother of Michael Dell) and Mark Cuban (famous sports owner of the Dallas Mavs).

In a letter to Yahoo, here is what Icahn wrote: “It is quite obvious that Microsoft’s bid of $33 per share is a superior alternative to Yahoo’s prospects on a standalone basis. I am perplexed by the board’s actions. It is irresponsible to hide behind management’s more than overly optimistic financial forecasts. It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo’s closing price of $19.18 on the day before the initial Microsoft offer.”

Good stuff no doubt but can you ride this upcoming rally in Yahoo? What it boils down to is if Yahoo will get bought out at $30 or higher. I can tell you this, Icahn isn’t going to keep his money locked up for long. No way. Yahoo’s annual shareholder meeting is set for July 3 so there you go.

The action on Yahoo’s June 27.50 calls (YHQFY, $1.20, down $0.32) is ridiculous. So far, 42,000 contracts have traded. I can see the logic with this one. Option traders are betting $120 to make $250. If Yahoo is at $30 by June 20 then they double their money.

The July 27.50 calls (YHQGY, $1.91, down $0.12) have traded 15,000 contracts and these don’t expire until July 18.

I’m not getting on a soap box and yelling that these are good bets, all I’m saying is that the crowd seems to be following Icahn once again.

Rick Rouse
Rick@OptionsMentoring.com

Billionaire investor Carl Icahn is at it again. The word on the street is Mr. Icahn is considering launching a proxy fight at Yahoo (YHOO, $26.56, up $1.30) after building a significant position in the company. After buying as much as 50 million shares, the plan is to replace all or part of Yahoo’s board and get Microsoft (MSFT, $29.78, down $0.10) back to the negotiation table.

In case you haven’t heard of Carl Icahn, he was once considered an “obsessive corporate raider” after scoring big with takeovers of Texaco and USX back in the ’80’s. Now he is considered an “activist shareholder” that takes minority stakes in public companies and typically pushes for change, often threatening a proxy battle, through his hedge fund.

His hedge fund, Icahn Partners, was created in late 2004 and manages about $8 billion, of which $1.5 billion is his own money. Usually what happens is that after acquiring a small stake in a company, Mr. Icahn puts pressure on the CEO’s to do a big stock buyback or spin-off assets in order to get the stock moving. And in some cases he forces the CEO out altogether.

There’s no guarantee that Microsoft will return to the bargaining table should he be successful in replacing all or part of Yahoo’s board, but either way, he’s shaking things up. However, time is limited. The deadline for a proxy fight is this Thursday as Yahoo’s shareholders have until then to nominate a board of directors.

Rick Rouse
Rick@OptionsMentoring.com

Yahoo (YHOO, $23.02, down $5.65) just opened for trading and the stock is down 20+%. The stock will probably bounce off these lows but I don’t see much of a comeback for Yahoo. The put options are trading higher but the lower put strike prices (22.50 and 20) are not yet in-the-money. These options do not expire until May 16.

May 25 Put (YHQQE, $3.00, up $2.31)
May 22.50 Put (YHQQX, $1.50, up $1.13)
May 20 Put (YHQQD, $0.66, up $0.49)

If Yahoo rebounds, these puts will trade lower. It’s a little too risky to play these puts straight-up because of the volatility but there will be some volume. It will be interesting to see how Yahoo finishes the trading session today and the rest of the week. One thing is for certain though, Yahoo will have a lot of explaining to do with its shareholders if the stock price continues to fall.

Rick Rouse
Rick@OptionsMentoring.com

Like a kid at Christmas, I almost couldn’t sleep last night in anticipation of what Yahoo’s (YHOO, $28.67) stock will do this morning after Microsoft (MSFT, $29.24) bailed out of pursuing a merger over the weekend. I have been following the May put options on Yahoo for nearly two weeks through this Blog (for educational purposes only) and wanted to illustrate the volatility of taking positions like these without any protection or “hedging”.

April 25th

May 25 Put (YHQQE, $1.04, up $0.40) up 63%, 32,000 contracts traded
May 22.50 Put (YHQQX, $0.54, up $0.24) up 70%, 16,000 contracts traded
May 20 Put (YHQQD, $0.24, up $0.12) up 100%, 23,000 contracts traded

May 2nd

May 25 Put (YHQQE, $0.69, down $0.49) down 42%, 31,000 contracts traded
May 22.50 Put (YHQQX, $0.37, down $0.12) down 24%, 15,000 contracts traded
May 20 Put (YHQQD, $0.17, down $0.04) down 19%, 45,000 contracts traded

As you can see, these put options were profitable until Friday. That is when the rumor mill got rolling with news that Microsoft would be raising the premium for Yahoo. In fact, investors thought it was so much of a done deal that the stock was trading at $29.70 in after-hours trading meaning if things would have held to form these puts most likely would have expired worthless.

However, this wasn’t the case. Time decay was putting pressure on the May 20 and 22.50 puts as time decay starts to speed up in the last month of an option contract for out-of-the-money options. I’ll add an update around 10AM EST on the end of this post once Yahoo opens.

Rick Rouse
Rick@OptionsMentoring.com

It’s official, Microsoft (MSFT, $29.24, down $0.16) has withdrawn it for Yahoo ($28.67, up $1.86). After going as high as $33 a share, Yahoo held out for $37 which Microsoft simply felt was too high. Microsoft’s decision to walk away from the table came Saturday after last-minute efforts to negotiate a mutually acceptable deal. I sensed Yahoo was going to be stubborn and that was questioned after Microsoft raised its bid late Friday. However, when it was all said and done Yahoo stuck to its guns as did Microsoft.

Here is what Microsoft’s CEO, Steve Ballmer had to say, “After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal.”

Yahoo’s Jerry Yang’s response, “With the distraction of Microsoft’s unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history.”

It was a surprise ending and I compared the drama to a script out of Hollywood. And we all know how Hollywood works. This story is bound to have another sequel (Microsoft tried to buy Yahoo once before) so we could see a “Microsoft/ Yahoo 3″.

As for now, there will be interesting subplots. What happens to Yahoo’s stock price? Is something in the wings with Google? If Yahoo’s stock drops back into the teens will Microsoft start buying shares in the open market? Does Microsoft look elsewhere for a partner…ValueClick (VCLK, $19.93, down $0.19)?

One thing is for certain come Monday. All three stocks will be very active.

Rick Rouse
Rick@OptionsMentoring.com