Jerry Yang might not be Yahoo’s CEO anymore but he did stay at a Holiday Inn Express last night. Shares of Yahoo (YHOO, $12.10, up $1.47) are up nearly 15% today on news that co-founder Yang will step down from his CEO duties once the company finds a replacement. In what has been one of the worst performances Wall Street has ever witnessed, it is hard to believe that dude is stepping down after blowing up the company right in front of shareholders.

Yahoo shares have lost 60% of its value since Yang took over last year. His claim to fame will be the botched deal with Microsoft (MSFT, $19.33, up $0.14), which had offered $33 per share, or $47 billion, to buy the company. The departure of Yang now clears the way for us to get a clearer picture on what Yahoo’s plans will be.

Although Yang will remain on the company’s board, the new CEO will likely give hints as to what direction the company will be taking. Will Yahoo actively seek a merger or will it try and remain independant? No matter what happens, somewhere, Carl Icahn has to be smiling.

The Yahoo November 11 calls (YHQKK, $1.27, up $0.70) are the most active in the November call chain. For December, option traders seem to be targeting the December 13 calls (YHQLM, $1.30, up $0.50). One would expect Yahoo to fade as the day wears on but sentiment could be changing on Wall Street.

Rick Rouse
Rick@OptionsMentoring.com

Yahoo (YHOO, $13.92, up $0.57) was back in the news again on Wednesday. The stock had a strong day despite the fact that Google (GOOG, $342.24, down $24.70) backed out of its advertising outsourcing agreement with the company. At one point, Yahoo traded as high as $14.84.

There were many on Wall Street who had speculated this deal would fall through mainly because Google didn’t want to have to deal with the anti-trust issues. That was loud and clear when Google’s legal rep had this to say:

“We’re of course disappointed that this deal won’t be moving ahead but we’re not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on.”

Sweet analogy.

Of course the bulls and bears immediately began to battle as bulls are hoping for another bid from Microsoft (MSFT, $22.08, down $1.45) while the bears are saying this is the end for Yahoo. What? You think it’s a coincidence that Yahoo’s CEO Jerry Yang had this to say after the closing bell: “To this day, I believe the best thing for Microsoft to do is to buy Yahoo,” ..

Yeah, that dude is drowning and begging Microsoft for a life jacket. Yahoo had an easy $33 a share, or nearly $48 billion in its back pocket when Microsoft was really wanting to buy the company and Yang held out for a few dollars more a share. It’s amazing sometimes how egos can get in the way of doing what is right for a company. This is a clear example of why America needs more shareholder rights. Afterall, you are not just buying stock of a company, you own part of the company when you buy stock. Shareholders could have gotten $33 a share a few months ago, now they will be lucky to get $20. It is what it is but Yahoo blew its chance of doing what was right for its shareholders.

The January 17.50 calls (YHQAW, $1.25, up $0.35) were one the plays we had in our Lottery portfolio. These calls were profiled around the same price that they are trading at now but did trade as high as $1.40. The November 15 calls (YHQKC, $1.30, up $0.80) were certainly a huge winner as they advanced 150+%. They traded as high as $1.38.

Yahoo’s rally was driven, in part, by rumors that Yahoo and Microsoft are close to an agreement of $17 to $19 a share — speculation that both companies denied. I had mentioned that companies are getting “cheap” again that would could see some M&A (merger and acquisition) activity. Chesapeake Energy (CHK, $24.83, up $1.88) and Yahoo are making the rounds and there is even fodder that Disney (DIS, $24.23, down $1.79) should buy Electronic Arts (ERTS, $22.37, down $1.03). M&A is coming and when it does it could be fast and furious.

I think Microsoft will make another run at Yahoo and I would expect it to be sooner rather than later. Microsoft still wants Yahoo but is trying to get it as cheap as it can. Microsoft is a cash cow and it needs Yahoo’s search engine and huge audience if it ever wants to mount any serious threat to Google.

The November options are a big risk as time would be working against you waiting for this marriage to happen. The contracts expire in 15 days and I don’t think anything will get done that quick. It could but that is why we went out to the January options from the get-go. If Yahoo gets a minimum $20 bid then the January 17.50 calls would be worth at least $2.50 or a double from current levels if Microsoft comes in with that kind of bid.

Maybe by Christmas a deal gets done but I have been telling you the $33 bid from Microsoft six-months ago would continue to haunt Yahoo shareholders once Yang blew it.

Keep holding the Yahoo call options and remember that they are a lottery play. You could take the profits you have now but it would be like winning $5 on a $5 lottery ticket. We are at least trying to double our money.

Rick Rouse
Rick@OptionsMentoring.com

Here’s an update from the lottery plays I profiled last Monday:

Entry Exit Current Action Expiration

Microsoft (MSFT, $23.93)
April 25 calls (MSQDE) $2.35 $2.90 $3.00 Hold 4/17/09

Google (GOOG, $372.54)
March 500 calls (GOPCO) $11.50 $15.00 $17.00 Hold 3/20/09

Yahoo (YHOO, $12.90)
January 17.50 calls (YHQAW) $1.30 $1.20 Buy 1/16/09

J&J (JNJ, $62.65)
Nov 60 calls (JNJKL) $3.30 $6.60 $4.70 Sell 11/21/08
April 70 calls (JNJDN) $1.50 $3.00 $2.75 Hold 4/17/09

Goldman Sachs (GS, $114.30)
January 125 calls (GSAE) $7.25 $15.00 $10.90 Hold 1/16/09

**Microsoft has a 25% stop above the $2.35 entry and would be attractive if the calls fell back to $2.35.

**Google had a sweet Friday, up nearly $20 for the day and hitting a high of $386 in the process. The October strangle two-day option trade was a huge success as it returned 100+%.

**Yahoo spiked to $13.73 on MSFT talk and the calls hit $1.50 before fading. I will be miffed if Yahoo is still solo by the end of the year.

**Johnson & Johnson was an awesome trade for the November calls and I don’t recommend any new positions in them as they returned 100% before slipping to current levels. The April calls still look good.

** Goldman Sachs rallied to $128 last Tuesday and the October 100 call options were a monster trade returning well over 100%-200% gains!

**Arch Coal (ACI, $24.15), Massey Energy (MEE, $23.30) and Patriot Coal (PCX, $16.61) were all stopped out with 20%-25% gains but I wouldn’t be a buyer of the November options anymore so I didn’t even list them.

Rick Rouse
Rick@OptionsMentoring.com

The relief rally was on today as the Dow zoomed 936 points as bulls rushed in to buy stocks that have been beaten down 50%-80% in just over a month. If you read the blog that I posted over the weekend, then you could tell how excited I was to go long the market. There were a ton of positions that could have been bought at the open this morning and it felt like I was going Christmas shopping on the Friday after Thanksgiving. That day is the biggest shopping day of the year as consumers rush to the malls at 4am to get the best deals. That is exactly what was happening at the opening bell this morning.

The Dow was up a quick 400 points right off the bat and its 11% gain was ithe biggest since the Great Depression. For the record, the Dow officially closed at 9,387. The “dead cat bounce”, “relief rally”, “oversold rally” or whatever you want to call it also pushed the S&P 500 and Nasdaq higher by 104 and 195 points, respectively. The S&P 500 closed at 1,003 while the Naz closed at 1,844.

But can the rally be trusted? The key point I made over the weekend was that you should only be looking out 6-12 months and it is hard to say if this rally will hold. However, today was our shopping day and here is what I had on my Christmas list from the weekend for my Lottery Play Portfolio.

Microsoft (MSFT, $25.50, up $4.00). If you’ve been reading the blog then you know how much I’ve mentioned this stock. This company has over $20 billion in cash and no sub-prime exposure. Share buybacks, dividend distributions, and acquisitions have eaten away at the company’s coffers - two years ago they had nearly $60 billion but the company’s products still generate about $1 billion a month. The stock fell to a low of $20.65 Friday. This morning, the April 25 calls (MSQDE, $3.30, up $1.30) opened at $2.35 and closed 65% higher for the day. Even at $2.35, you still got a 40% gain if you bought at the open. The April calls are over 6-months out and expire on April 17, 2009. If these calls get back to this level, don’t hesitate to jump on the. If you got in today with a half or full position then you could set 25% stops in case the stock retreats.

Google (GOOG, $381.02, up $49.02) turned out to be a “Blue-Light” special as it rallied 15%. This stock was on sale at half-off from its 52-week high of nearly $750 and the March 500 calls ($19.40, up $6.20) opened at $11.50 and briefly traded over $20. Google still has earnings so if you got in early, set stops at $15 or so.

Yahoo (YHOO, $13.49, up $1.20) fell below $12 last Friday and although it didn’t get the big pop Microsoft and Google did, it still managed a 10% gain. I didn’t go too far out on Yahoo call options because I still think the company is a mess (not taking the $33 a share from Microsoft still haunts shareholders). Remember though, we are not trading on fundamentals for some of these plays, just on what appears to be cheap. The January 17.50 calls (YHQAW, $1.33, up $0.06) were the most active but I don’t expect much from this one. In fact, set stops 20% below your entry price instead of the usual 50%.

Johnson & Johnson (JNJ, $62.68, up $6.83) was a no-brainer and a really safe play. The stock was up over 12% and I had mentioned the big drop after hitting a 52-week high a month ago. The November 60 calls (JNJKL, $4.70, up $1.70) opened at $3.30 as volume came in at 4x open interest. I love this stock for the short and long-term which is why the April 70 calls (JNJDN, $2.00, up $0.50) looked like a down-right steal at $1.50 this morning. If you missed today’s jump you could start building half-positions even at these levels.

I didn’t like General Motors (GM, $6.51, up $1.62) and still don’t although the 33% rally today was very impressive. We rode Ford and GM all the way down to these levels a few months ago and while there may or may not be bankruptcy in their future, I just think there are better trades out there. If you are a die-hard bull, the GM 2010 January 5 calls (WGMAA, $3.65, up $0.50) saw a lot of action as nearly 5,000 contracts traded. The 7.50’s (WGMAR, $3.15, up $0.65) weren’t nearly as popular, trading only 200 contracts.

Arch Coal (ACI, $27.32, up $5.28). The November 25 calls (ACIKE, $5.20, up $1.60) opened at $4.50.

Massey Energy (MEE, $26.47, up $5.74). The November 25 calls (MEEJE, $1.85, up $0.75) opened at $1.00.

Patriot Coal (PCX, $19.50, up $4.90) also made a nice comeback. The November 20 calls (PCXKD, $3.60, up $1.40) opened at $2.40.

There were a couple of other energy stocks I mentioned but I didn’t want to go too heavy on the sector.

Morgan Stanley ($18.10, up $8.42) was a huge story today after the company nearly went bankrupt last week. The investment bank went through a zany week of trading as many on Wall Street pondered its future. Mitsubishi Financial Group of Japan was the knight in shining armor for Morgan as they made a $9 billion investment in the company. The October 15 calls (MSJC, $3.80, up $2.61) were up 220% today.

Goldman Sachs (GS, $111.00, up $22.20) has made up 40 points since hiting a low of $74 last Friday. What a steal it was below $100 or even $80 for that matter. Remember, Buffett is in at $5 billion with another $5 billion waiting in the wings. The October 100 calls (GSJT, $15.50, up $10.00) opened at $6.95. An easy double as the day went on. If you bought at the open, set stops at $11.00. The January 125 calls (GSAE, $11.60, up $4.35) didn’t have the banner day as the October calls did but still were up 60% for the day.

There were a slew of other good trades, too many more for me to list but you got the idea. Keep an eye on some of the calls I have mentioned. They may get cheaper and they may not. It’s too early to call this a rebound and there is no way of predicting where we are headed over the next few days. Remember, earnings are on tap and they will certainly sway the market.

Rick Rouse
Rick@OptionsMentoring.com

Words can’t describe the excitement we’ve seen in the market over the past few weeks and Friday was a classic example of what could be described as “running for the hills”. Wall Street was in full fledged panic mode Friday as the Dow went back and forth in a 1,000-point range, hitting a low of 7,882 and a high of 8,901.

The last hour of trading was a toe-to-toe battle between the bulls and the bears that left both sides bloody. It was awesome. By the final bell the market had mixed results as the Dow fell 128 points to 8,451, while the S&P 500 slipped 11 points to 899. The Nasdaq held its own and managed to finish in the green, up 4 points to 1,649.

The final score for the week was a clear victory for the bears, however, as they hit the Dow and S&P 500 for 18%, while the Nasdaq slid 15%.

As a result, a lot of companies went on sale, at least in my mind. More on that in a minute. While it is extremely hard to predict a market bottom, there are signs that at least we are getting close. I still don’t trust October but as bad as the month has been historically, it is often the best time to buy when looking at long-term stocks or options if there has been a correction.

Yeap, it’s gonna be hard to go long right now, but with a game plan you can advantage of everyone’s elses fear. Take a look at how some of these big names traded on Friday.

Microsoft (MSFT, $21.50, down $0.80) hit a low of $20.65. Are you kidding me? Back in April when Microsoft was trading at $30 did you ever think you would have the chance to buy it at $20?

Back in May, Google (GOOG, $332.00, up $3.02) was at $600. Yesterday it traded as low as $310. At half-price, is it a Blue-light special?

How stupid does Yahoo (YHOO, $12.29, down $0.36) look now for not taking Microsoft’s $30+ a share offer? Yahoo may not be worth $30 but it does look cheap at $12.

Johnson & Johnson (JNJ, $55.85, down $1.73) was at a 52-week high less than a month ago and hit a 52-week low of $52. Crazy. Just crazy, man.

General Motors (GM, $4.89, up $0.13) got chopped in half after after Standard & Poor’s Ratings Services said the company’s credit could drop further.

Energy companies have taken a whippin’ as oil prices fell 10% to a 13-month low of $78 a barrel. That’s the lowest its been in a year. Gas is going for $2.99 a gallon here on the east coast. Remember our Energy Watch list from June?

Arch Coal (ACI, $22.04, up $0.49) was at $70.

Massey Energy (MEE, $20.73, down $1.15) was at $84.

Patriot Coal (PCX, $14.60, down $0.23) was at $154. There was a 2-for-1 stock-split in August at $100. Still, the shares have fallen from $154 to $28 ($14 split-adjusted)? Incredible.

Peabody Energy (BTU, $28.65, down $0.93) was $77.

Joy Global (JOYG, $28.88, down $2.09) was at $85.

I profiled quite a few of them on June 4 and two weeks later they had returns of 100%-300% as the call options exploded when the stocks were hitting new 52-week highs. Click here to view these blogs.

The VIX (^VIX, 69.95, up 6.03) blasted through the 60’s and nearly hit 77. On Tuesday, the VIX was at 52 when I said that the 60’s look like a good bet.

The point I’m trying to make is that some stocks ran too high too fast and now some of them have gone too far to the downside. Somewhere in the middle is where they may be fairly valued but we are more worried about the options on these stocks, not the funadamentals. I still don’t trust the financial stocks but there will be some winners out there once the dust settles.

The credit crunch, President Bush, the press and the talking heads have scared the be-Jesus out of everybody and nothing seems to be working to restore faith in the market. Remember what I have said about not following the herd. Yes, the market is tanking and there’s more downside risk. But everybody needs to quit beating the horse. It’s already dead. Now is the time to start buying for 6-12 months down the road.

I’m working on a “Lottery Portfolio” this weekend and I will be picking some stocks and sectors that may be worth a gamble. The market is open for business on Columbus Day although banks will be closed. Right now Wall Street can’t see the forest for the trees and hopefully by doing a Lottery Portfolio, I will be able to show you the bigger picture.

Rick Rouse
Rick@OptionsMentoring.com

The “timing is everything” quote couldn’t have had more meaning today with a few of our trades. The bears had thoughts on taking the financial sector lower until the bulls stepped in and took over. The earlier blog this morning couldn’t have come at a better time although it’s a little too early to tell if the trades will pay off big.

To start, there were a few trades I mentioned this morning involving Citigroup (C, $17.49, up $0.30), Lehman Brothers (LEH, $13.73, up $0.66) and Wachovia (WB, $14.90, up $0.60). All three stocks had a volatile session and were all over the map providing traders with plenty of good entry points.

The Citigroup January 20 calls (CAD, $1.52, up $0.03) traded as low as $1.30 and were a nickle off from our target entry price of $1.25. Some of you may have pulled the trigger at $1.30 which was close enough and are now looking at a 15% gain. You could set stops at your entry price if the volatility is too much for you to bear.

Trading Lehman Brothers could be like catching a falling knife, eventually, because the “bankruptcy” rumors are flying around this company like pigeons on a boardwalk. Lehman could be in serious trouble unless it sells some of its assets which is being considered. I said the January 20 calls (LYHAD, $1.80, up $0.25) were “mouth-watering” at $1.40 and low and behold, they were. The calls made a nice 30% gain by the end of the day. We are targeting the $2.00 level as an exit for a quick 40% profit and a stop of $1.60 gets you a 15% return.

Wachovia shares rebounded 6% from the morning blog after news broke that a private real estate company had bought some of the bank’s troubled land and construction loans. The January 15 calls (WBAC, $3.50, up $0.20) were trading for $3.00 and ended the day 17% higher than our entry price. The stock really got some legs after the news and was looking at busting through $15 before the final bell sounded. If the stock can back to the $17-$18 range over the next week or so, we could be looking at 50%+ returns.

And finally, there’s Yahoo (YHOO, $19.17, down $0.25) which continued lower throughout the rest of the day. The October 20 calls (YHQJD, $1.30, down $0.20) and the January 22.50 calls (YHQAX, $1.35, down $0.10) provided us good entry points today because…after the closing bell Yahoo announced an Internet-TV deal with Intel (INTC, $23.39, down $0.20) that will provide users a new and unique way of using the Internet.

The Widget Channel could be Yahoo’s wild card that saves the company’s stock. Intel’s chip, called Intel Media Processor 3100, will start appearing in televisions, set-top boxes and other television-connected gizmos as early as next year. Yahoo will then bring the Internet to TV by using bite-sized snippets, or widgets, rather than the whole Internet.

The technology sounds exciting although the news did not do much for Yahoo’s stock in after-hours trading. The shares are up only two cents but Yahoo should open higher on Thursday after the talking heads pump up the news.

Rick Rouse
Rick@OptionsMentoring.com

Yahoo (YHOO, $19.38, down $0.05) has dipped below $20 again and it may be time to start nibbling on a small position. The stock has taken a back seat to the financial sector right now and it may be a good time to take advantage of the drop below $20.

We all know when it comes to online search, Google (GOOG, $4865.99, down $4.51) is king. The numbers were just released for July and it showed that Google is increasing its share of the U.S. online search market. Google now commands 60% of the market, up 16%, as rivals Yahoo and Microsoft (MSFT, $27.39, up $0.07) each saw their respective shares decrease. Yahoo’s search share drop 11% from a year earlier to 17%, and Microsoft saw its share drop 10% to 12%.

Microsoft has seen this coming as it feverishly tries to play catch-up. The latest numbers show just how important it is for both companies to do something now in order to gain ground, or in this case reclaim lost ground, on Google in the lucrative online search advertising market. Yahoo can’t do it alone and there are other companies besides Microsoft who may jump back into the frey to acquire Yahoo.

Either way, Yahoo should get some interest from the market at current levels. Timing is everything and we are going to “layer” this trade in case we need more time for it to develop. The Yahoo October 20 calls (YHQJD, $1.50, unchanged) look attractive here for a half position and the January 22.50 calls (YHQAX, $1.45, unchanged) for the other half. I think Yahoo will make a move back above $20 once interest starts to pick back up in the stock.

Rick Rouse
Rick@OptionsMentoring.com

With the Dow slipping 110 points two hours into the trading session, one bright spot so far has been Microsoft (MSFT, $27.43, up $0.41). The stock is having a great week after touching a low of $25.11 Monday. There’s no real news concerning Microsoft. The fact that Carl Icahn has joined Yahoo’s (YHOO, $19.83, down $0.17) board is what’s moving Microsoft.

We all know Microsoft is the only straw stirring Yahoo’s drink right now and the recent blunders by Yahoo only confirm it. Yahoo is such a mess, I’m really surprised the stock’s not at $15 right now. It had already been pre-announced that Icahn would join the board on August 1 but when Yahoo announced there was an “error” in calculating the reporting votes from the shareholders, it just doesn’t look good. It fact it’s embarrassing.

Reporting votes are votes that show the approval or disapproval for members of the board. Yahoo’s Jerry Chang disapproval more than doubled what was previously reported, rising from 15% votes withheld to 34%. Chairman Roy Bostock saw his shares withheld rise from 21% to 40%.

Microsoft has always been strong when it touches $25 meaning it will hold this level and trade higher from there. This has been proven by the charts for the last few years. Do yourself a favor and pull up the two-year chart on Microsoft. The stock trades from $25 to $30 sometimes $33-$34 and then heads back lower.

I have some friends that don’t really trade options but took this advice and they buy a few hundred shares of Microsoft when it touches $24-$25 and they simply wait until it goes back to $30 or higher. If you buy at $24 and sell at $30, it’s a 25% gain pure and simple. Even through the turmoil that can come with the market, this trade has been golden. Sometimes when the stock gets to the $25-$26 level you can buy an option on the next month out and play Microsoft that way.

This method is a little riskier because of the different factors that affect the way the options will react. However, the option traders who bought the September 28 calls (MSQIT, $0.89, up $0.26) on Monday are up another 41% this morning. Something to think about in the future when you see Microsoft at $25 again.

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

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