Trading alt volatility
08/01/18

Back in the tech Stone Age—that is, around 18 years ago—there was an internet company that so dominated the search business that its funny-sounding name became synonymous with looking something up online. It had a catchy slogan, a popular commercial jingle, and it seemed like it could never be knocked off its lofty cyber perch.

We’re talking about Yahoo, of course, shares of which hit $500 in the final stages of the dot-com bubble in early 2000 before deflating soon after. To make a very long story short, Yahoo was eventually consigned to the market history books by Google/Alphabet (GOOG). (Fun fact: In its early days, Google approached Yahoo for financing and Yahoo wasn’t interested; in 2002 it spurned Yahoo’s $3 billion buyout offer.1)

No, this isn’t a story about how the same thing could happen to GOOG (but don’t get complacent, guys). It’s about what’s happening with Yahoo now. The company, which once traded under the symbol YHOO, was scooped up by Verizon (VZ) in 2016, but some of its key assets were packaged into a holding company that began trading in mid-2017.2

All anyone needed to know about those “key assets” was (sort of) in the new company’s name: Altaba (AABA), as in “alternative BABA”—BABA being the ticker symbol of Chinese internet behemoth Alibaba, a company Yahoo happened to buy 15% of in 2005. And that stake is pretty much Yahoo’s market legacy these days. The following daily chart of Alibaba and Altaba shows that, as goes BABA, so goes AABA:

Altaba (AABA) and Alibaba (BABA), 6/21/17 – 7/31/18. Daily price chart.

Source: OptionsHouse

Backstory aside, yesterday’s trading activity highlighted a potential reason to trade AABA options rather than BABA options in certain situations.

In early trading, a LiveAction scan for unusual volatility conditions showed the implied volatility (IV) in AABA options had increased significantly from the opening. The following chart shows AABA implied volatility (bottom) was close to its highest level of the past several months:

Altaba (AABA), 11/17/17 – 7/31/18. IV near highs.

Source: OptionsHouse

By comparison, BABA didn’t appear on the LiveAction volatility scan yesterday, and its options IV was below its levels from January and April.

Because higher IV can translate into higher options prices, these conditions suggested AABA options were potentially trading at a premium, which would make them better candidates for short trades. For example, the chart below shows the risk-reward profile for a AABA August $65/$82 short strangle, which consists of selling both the August $82 call and the August $65 put. A trader would put on this type of position when the stock was expected to trade between the two strike prices until expiration. (A trader who expected an up move in the stock could simply sell puts, while a more bearish trader could sell calls.)

AABA short strangle profile, 7/31/18. Shorting options.

Source: OptionsHouse

By the same token, if AABA options were relatively underpriced to BABA options, some traders may consider buying them. You need to be on your toes to find such AABA-BABA “inefficiencies,” but when they appear, they may offer an edge.

 

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1 Wired. How Yahoo Blew It. 2/1/07.

2 CNN.com. So long, Yahoo. Hello ... Altaba? 6/19/2017.