Shaun Carter dot Com

On Friday morning I decided to enter in some trades that take advantage of the Microsoft/Yahoo deal drama that has been going on for a while. Microsoft set a deadline of Saturday April 26 (yesterday) for Yahoo to accept it’s unsolicited offer of $31 per share. I saw an opportunity to enter into an option strangle on Yahoo with May 25.00 Puts and May 27.50 Calls.

Yahoo is going to move big one way or the other based on how the news pans out Monday morning and whether or not Microsoft or Yahoo have anything to add to the mix. By trading with a straddle or strangle I am able to profit on a big move in either direction, or end up with a big loss on no price movement. While my gut tells me that Yahoo will drop significantly on Monday as Microsoft threatens to walk away from the deal completely, I also wanted some insurance against a surprise increase in the bid to appease Yahoo’s board and facilitate a friendly acquisition.

On this trade, if Yahoo moves down to 20 - I profit at least $500 per Put contract. If Yahoo approves the bid of 31 later in the week - I profit $400 per Call. If the bid is increased, the profits on the Call option increase accordingly.

Because of my feeling that Microsoft will walk away from the deal, I also entered into a June 32 Call contract for Microsoft. I believe that if they walk away, shareholders will cheer and enthusiastically buy the stock up to 35-40, meaning a $300-800 profit per contract.

I am now just awaiting the news and the opening prices for the two stocks on Monday. I expect this to be a very short trade, just long enough to take advantage of the news and get out.

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