Yahoo Spinoff Talks Send Hedges to 2015 High as Shares Surge

  • Protection cost for Yahoo shares highest since December 2014
  • Company said to consider Alibaba stake sale at board meeting

Yahoo’s Internet Business Struggles, Considers Selling

As Yahoo! Inc. weighs corporate restructuring plans, options traders are paying a premium to play it safe.

Implied volatility on Yahoo’s stock is at its highest of the year versus an exchange-traded fund mirroring the Nasdaq 100 Index, according to data compiled by Bloomberg. The increase signals rising demand for options used to hedge against losses in Yahoo, whose stock has climbed almost 25 percent since the end of September. That increase includes Wednesday’s 5.8 percent gain, the biggest single-day jump in two months.

The stock is soaring as Yahoo directors meet this week to discuss the viability of spinning off its stake in Alibaba Group Holding Ltd. and whether to seek a buyer for the company’s Web businesses. Some options investors are treading with caution, looking to protect recent gains or bracing for further news that could result in stock turbulence, according to Mark Sebastian of Option Pit.

“We’re seeing a huge volatility spike,” said Sebastian, options trader and founder of Option Pit, a Chicago-based education and consulting firm. “With all these meetings going on, there are expectations of a massive move, and that’s being priced into the volatility premium.”

Since dropping to a more than two-year low on Sept. 28, Yahoo’s stock has increased 24 percent, double the gain for the Nasdaq 100. It’s been the 11th-best-performing stock in a Standard & Poor’s 500 Index gauge of technology companies over that period. Yahoo fell 3.7 percent to $34.34 at 4 p.m. in New York.

Yahoo is recovering from losses earlier in the year. The company had dropped 45 percent through the September low. It’s still down 32 percent for 2015, while the Nasdaq gauge has increased 8.8 percent. Investors are awaiting a turnaround as Yahoo’s sales slide and market share shrinks.

In meetings this week, Yahoo’s board of directors is discussing whether to stick to the company’s plan to spin off its stake in Alibaba, a person familiar with the situation said. The board is also weighing whether it will seek a buyer for Yahoo’s Web businesses, said another person familiar with the matter who asked not to be identified because the talks are private. Representatives for Sunnyvale, California-based Yahoo declined to comment.

Chief Executive Officer Marissa Mayer had planned to complete the spinoff by January and promised to update investors on her strategy for the rest of the ailing Web portal. Mayer is facing renewed pressure from activist investor Starboard Value, which last month threatened a proxy fight if she doesn’t make drastic changes to her plans, including selling the main search and display advertising businesses.

“The best outcome for shareholders would be for Yahoo’s board to immediately abandon the spin and commence a competitive process to sell its valuable core business at the highest price possible,” Jeff Smith, co-founder and chief executive officer of Starboard, wrote in an e-mailed statement on Thursday. “It is imperative for Yahoo’s board to understand its fiduciary responsibility is to the shareholders and act as proper stewards of shareholder value.”

Elevated hedging premiums for Yahoo can be seen in the three-month implied volatility spread between the company’s stock and the Powershares QQQ Trust Series Fund. The measure rose to 22.63 on Nov. 27, the highest since Dec. 11, 2014, according to Bloomberg data. That’s 44 percent above its one-year average of 15.67, the data show.

“There are some potentially big moves ahead, so I’m not surprised implied volatility is spiking,” said Stephen Solaka, managing partner of Belmont Capital Group in Los Angeles, which oversees about $275 million. “There’s uncertainty about future events, and people are using the options market to play that.”

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