hiddenJan 27, 2015 10:11:42 IST
Yahoo shares are expected to move nearly twice as much as they have following other recent earnings reports when the company announces fourth-quarter results, options data showed.
Yahoo is scheduled to report results after the close of market on Tuesday, and much of investors' focus will be on the company's plans for its 15 percent stake in Chinese e-commerce giant Alibaba Group Holding.
Chief Executive Marissa Mayer has been facing pressure from investors to sell Yahoo's stake in Alibaba in a tax-efficient manner and return the money to shareholders. Yahoo's plans for avoiding tax on its Asian assets will have big implications for a post-earnings move in the company’s shares, analysts said.
Yahoo has created a consensus expectation that it will announce that all the value currently locked in its stake in Alibaba will be transferred to its shareholders with minimum tax leakage, analysts at Bernstein Research wrote in a recent note.
"Anything short of this and we believe investors will be disappointed and the stock will trade down significantly," the analysts said.
The lack of clarity on how Yahoo plans to use its Alibaba stake and how investors will react to the Internet giant's plans is reflected in the options market; Yahoo options are pricing a greater-than-usual move after earnings.
“A reasonable amount of uncertainty appears to be embedded in the options market,” Jim Strugger, derivatives strategist at MKM Partners, said.
The cost of a Yahoo straddle, in which an investor buys an at-the-money put option and a similar call option, suggests a move of about 8.1 percent in the stock in either direction by Friday. Over the last eight quarters, Yahoo shares have on average moved 4.9 percent the day after earnings.
The 30-day at-the-money implied volatility, a gauge of the risk of large moves in the shares, is at 47.3 percent, or higher than 88 percent of readings in the last 52 weeks, according to options analytics firm Trade Alert.
The ratio of Yahoo puts-to-calls open interest, however, is around the midpoint of its range over the past several years and does not reveal an obvious bias towards either side, Strugger said.
Yahoo shares have risen more than 20 percent since it reported third-quarter results in October. The shares were trading up about 1 percent at $49.39 on Nasdaq on Monday afternoon.
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