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Yahoo (YHOO)

"Buy to Open" the YHOO March 16 Calls (YHQCQ) for 13 cents or less and "Sell to Open" the YHOO March 10 Puts (YHQOB) for 14 cents or more for a net credit of 1 cent

Dear Fellow Options Traders,

On Jan. 13, 2009, Carol Bartz became the new CEO of Yahoo (YHOO). Formerly, Bartz was at Sun Microsystems (JAVA) in its early days and then spent 14 years running Autodesk (ADSK).

Since Bartz joined YHOO, there has been speculation that Microsoft (MSFT) may have renewed interest in working with YHOO to better compete with Google (GOOG). Today, Steve Ballmer, Microsoft's CEO, gave the speculation some backbone by talking about working together with Yahoo and having further conversation with Bartz.

After losing the MSFT bid when it was more than $30 per share, it appears YHOO investors may have grown weary of hanging on for the possible MSFT acquisition. With the news on the tape, the stock is up more than 5%. Options investors appear more interested, as well, since we are seeing significant call spread activity today.

We think joining them is a prudent idea. We're going to take a bullish stance with a credit spread in Yahoo.

"Buy to open" the YHOO March 16 Calls (YHQCQ) for 13 cents or less and, using a spread order, simultaneously "sell to open" an equal number of the YHOO March 10 Puts (YHQOB) for 14 cents or more for a net credit of at least 1 cent.

Remember, the exact prices you pay for each leg of the trade don't matter, as long as you establish the spread for a credit of at least a penny.

Buy buying the call and selling the put, we are essentially putting on a no-cost option play that will lead to profit just in case these two companies work out a deal in the next month.

Our only risk is that YHOO stock could fall below $10 per share at expiration, and we'll have the stock put to us. For this to happen, YHOO would have to decline by more than 20% during the month, MSFT would have to lose its buying interest and investors' confidence in Bartz and her new management team would have to be badly shaken.

What's more likely, and what we're aiming for, is that we can close both legs of the trade before March expiration by selling the YHOO March 16 Calls for a profit and buying back the YHOO March 10 Puts for less than we sold them.

As always, we'll keep you abreast of any required action, but for now this low-risk trade looks like a winner, as long as Yahoo, which is currently trading around $12.60, stays above $10 until March 20.

Have a good day trading.

Nick Atkeson and Andrew Houghton