Options traders seemed to be expecting good news from Yahoo on Monday well before the Internet media company said co-founder Jerry Yang would take over as chief executive, with heavy call volumes seen during the course of the day.
Yahoo announced after the stock market closed on Monday that Yang would replace CEO Terry Semel, responding to investor criticism over disappointing results and the growing dominance of Web search rival Google.
Yahoo shares rose as much as 6% in extended trade.
"The rumours of potential management changes at Yahoo started early Monday and before the markets opened," said Frederic Ruffy, analyst at options education firm Optionetics. He also noted Yahoo shares had opened higher on Monday.
Paul Foster, options strategist at theflyonthewall.com, cited speculation of a management change early on Monday on the Web information site.
There had even been speculation of a management change on Friday, said Joseph Cusick, senior market analyst at brokerage firm optionsXpress.
In the options market, Optionetics' Ruffy noticed heavy volume in the early hours, somewhat of a lull in midday action and then another jump in calls late in the day.
Options volume was heavily skewed towards calls, which give investors the right to buy Yahoo shares at a given price and time. Investors often look to equity calls to profit from a potential rise in a stock. A put conveys the right to sell the underlying security at a preset price.
Tom Sosnoff, president of online brokerage firm thinkorswim, said he saw a spike in stock and options activity starting at 1.30pm CDT that continued for 30 minutes. The stock then went sideways but the options activity was still heavy, with far more calls traded than puts.
A total of 138 560 calls changed hands, versus only 23 946 puts - a ratio of more than 5-to-1, according to Optionetics. In Yahoo's near-term July options alone, thinkorswim data saw roughly eight calls for every put traded.
The calls granting investors the right to buy Yahoo shares at $30 a piece by mid-July were the busiest, suggesting players were looking for a short-term rise in Yahoo stock, Optionetics' Ruffy said. Those calls traded a total of 44 346 lots.
Yahoo shares were trading up at $29.29 in extended trade and the July $30 calls, which closed the session at 80c a contract, will probably show a nice profit once the options market opens for trading on Tuesday morning, Ruffy said.
Market participants also said the demand for options pushed up Yahoo's July option implied volatility, or how much in percentage the stock is expected to move up or down in a rolling 12-month period based on option prices.
Yahoo's July option projected volatility increased about 20% to 45%, indicating that investors were expecting a stock move, thinkorswim's Sosnoff said.
"Yahoo shares have disappointed investors. The stock shed 7% in value since last June 2006," Sosnoff said. "I think now you may see a rotation in stocks that have underperformed like Yahoo in this sector."
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