I’ll just come out of the gate and say it. We used to trade Yahoo options almost every week. Yahoo options had penny wide bid/ask spreads, volume in the tens of thousands, and as many expiration cycles as any stock out there.
Before writing this article, I thought this was going to be a layup. Not more than a year ago, Yahoo was at the top of our list of stocks to keep an eye on each and every day. That list was comprised of some of the top stocks that we almost had positions on in no matter what. This group included $SPY, $AAPL, and yes, even $YHOO.
But for some reason, Yahoo is no longer on that list. To be honest, I don’t remember why it was taken off. I know that there was something about them maybe being bought or them completely changing their name or business, but whatever the case, we do not follow Yahoo anymore and currently do not have any Yahoo options positions.
Let’s give Yahoo and Yahoo options their fair chance. We are going to examine their markets just like we do every other stock or ETF that we go through. Because Yahoo was such a great trading vehicle for us not too long ago, we hope that we just glossed over Yahoo months ago as opposed to just removing it from our list on purpose. Maybe we can even add a Yahoo options position after this is all said and done!
The Good Old Days
Technology amazes me. I have no idea how a very old Yahoo commercial was recorded on VHS and somehow uploaded to YouTube like this. Amazing.
But anyway, we remember trading Yahoo, having Yahoo options positions on almost every day and saw our profits in Yahoo go up and up and up.
This is what Yahoo used to look like to us. Remember, we are primarily options traders, and the number one most important thing for options traders is obviously options liquidity.
Yahoo options were insanely liquid. Here is an image of April 15, 2016, Yahoo options monthly expiration taken from one year ago yesterday (March 23, 2016).
This is exactly why we loved trading YHOO. We see the bid/ask spreads are at most three cents wide here. This allowed us to get filled at midprice whenever we wanted with whatever size we wanted. This is the name of the game, folks.
What Does Yahoo Look Like Now?
From what we can tell, the stock is completely fine. It averages almost seven million shares traded per day
which with Yahoo currently trading for $46.40 is a total notional value of $323,299,934.40. This is almost a third of a billion dollars that exchange hands everyday trading Yahoo stock. Very liquid. And with this much liquidity, we are confident that the bid/ask spread of the stock will only be one or two pennies wide at the most.
However, we can see back at the beginning of 2015, Yahoo was more in play, and there was a lot more liquidity.
We can see Yahoo used to trade about three times the volume that it currently does now. Maybe we are on to something?
Yahoo Options Liquidity
While the stock used to trade a lot more volume, we used Yahoo as an options trading vehicle. Judging by the photo above of the Yahoo options chain, the markets were very competitive and quite liquid.
Because we have forgotten about Yahoo over the last year, let’s go through it like every other stock we go through and see if its options are liquid enough for us. If they are, we will happily add this symbol back to our watch list.
We will do with Yahoo what we do with every other stock, they must pass our test of four pieces of criteria:
- Volume test
- Expiration test
- Bid/ask test
- Open interest test
Yahoo Options Test
Let’s jump right in. Options volume. We need to see volume in the thousands to pass this part of the exam.
This looks good. It is nowhere where it used to be, but this number passes our test. 6,673 options exchanging hands is equivalent to 667,300 shares of stock or $30,962,720.
For the expiration test, we need to see not only monthly options expirations but also weekly expiration cycles. We need to see the weeklies here because we need to have confirmation that there is enough demand in the options market where the market makers think providing these extra cycles are necessary.
Very nice. This is what we were hoping to see. We see one expiration cycle every Friday which includes a combination of monthly expirations in gray and weekly expirations in yellow. Remember, the yellow weekly expiration cycles are only there because there is sufficient demand for them.
Next test…the bid/ask spread test. We should see the bid/ask spread on some of the contracts be only a few pennies wide. Let’s see what they currently have.
Remember, this is what they used to look like:
And this is what the look like now:
Yeah…not what it used to be. We see the at the money bid/ask spreads upwards of $0.30 here. That is crazy! We never trade anything that is more than $0.10 wide.
Markets like this show me that nobody cares. There is no competition for order flow here. Competition for order flow is what Yahoo options used to have. Now…nobody cares.
But maybe the open interest count is high?
The open interest isn’t that bad. We see a few contracts with an open interest count in the thousands including the $47 call which has over fifteen thousand contracts still open.
While three out of the four checkpoints to test to see if Yahoo options are liquid enough for us passed, the most crucial one (bid/ask spread) failed miserably.
What Went Wrong?
According to TechCrunch, Yahoo was acquired by Verizon on July 25, 2016.
Now things are starting to make sense. When a company gets acquired by another company, it’s pretty much dead. There is no participation, nobody cares, and it is removed from every trader’s watch list almost immediately.
After a company is bought, it does pretty much nothing for at least two years. In the case of Yahoo, Verizon is going to spend the better of the next two years restructuring the company, bringing on a new management team, and setting a new future for Yahoo. Because of this, we aren’t going to get the same type of stock movement that we would from a stock that isn’t dead.
When this happens, money starts to gravitate away from the company and away from the stock.
This is why we can see about a 66% reduction in stock volume and a 70% reduction in options volume from before the Verizon purchase until now.
Even better, the Verizon deal only involved the core business of Yahoo, which means their large stake in Alibaba will remain with the company. When the deal closes, and Verizon completes the purchase of the core business, Yahoo will be spun into a new company called Altaba.
What Do We Do Now?
Well…Yahoo is official dead to us traders. We cannot trade options in a stock that has bid/ask spreads of over $0.30. We just cannot willingly enter a trade having to take a loss to complete the transaction.
If we still want exposure to Yahoo, we recommend trading Alibaba. This new Altaba company is no more than a stake in Alibaba, and since Alibaba is incredibly liquid, we can just go ahead and trade its stock and options.
Again, markets don’t lie. Here we had an amazing trading vehicle with a lot of competition and liquidity and once the story changed, the liquidity ran away and went elsewhere. This is just an example of how markets are so perfect. Money goes to where money can be made. It goes to where the fairest and most competitive markets are so that it can be put to use where the most opportunity is.
If you are thinking about trading options and they look anything like the Yahoo options do now, you have to walk away. You cannot afford to enter a position with an immediate loss.
Let’s say we wanted to buy the $46 call here. The bid is $.76 and the offer is $1.05. This is a mid-price of about $.90. Do you think if you put in a bid of $.90 that you are going to get filled here? Absolutely not!
And if you think you are, you have never placed an options trade before in your life. To be very generous, let’s say we can get filled at $.95. We are giving up $.05 just to enter the trade which is $5 for every contract. Let’s say we are trading 10 Yahoo $46 options here, we have effectively entered the trade taking a $50 loss.
Then let’s say Yahoo goes higher and we want to sell those contracts. Do you think you are going to be able to sell those at mid-price? Hell no. Will you have to give up $.05 again? At least! That means that you gave up $.10 or $100 to buy and sell those contracts. That is a big deal and is why we HAVE to avoid markets like this at all costs.