When Microsoft (MSFT, $30.01, up $0.79) announced plans to buy Yahoo (YHOO, $28.51, up $0.48) back in February the stock was trading for $32.60. Sure, you can expect a drop in the acquiring company’s stock price and a premium in the company that is being acquired. After analyzing the deal, a week later I thought the Microsoft July 30 calls (MSQGF, $1.81, up $0.35) looked good for a longer-term option play. The calls were selling for $1.75 or so at the time. My reasons were simple. I thought the market had pushed Microsoft down to far at $28.

Much has happened since as you can follow the articles on the situation here:

http://www.optionsmentoring.com/stockoptions/index.shtml

Two weeks ago, Microsoft gave Yahoo until April 26 to accept its current offer and that day is approaching quickly. Microsoft has said it would launch a hostile takeover at a much lower price if the deal doesn’t get done. And the way things are looking, it doen’t appear if Yahoo is going to except.

The July 30 calls have traded as low as $1.00 since I profiled them and as high as $2.10. Today’s move above $30 is the first time Microsoft has traded above this level since the announcement. I had been hoping for a quicker recovery but that is why I went further out to the July calls to allow for more time.

If this deal doesn’t go through by next weekend, Microsoft’s stock could continue higher while Yahoo’s shares could have a real possibility of falling back into the teens. Also noteworthy is that Yahoo reports earnings on Tuesday while Microsoft reports Thursday.

The markets are having a tremendous week with the Dow, Nasdaq, and S&P 500 all up. Certainly we got some great earnings reports this week which has carried the market higher but I’m curious to if the gains will hold. The S&P has challenged the 1400 level three times now this year and has failed to break through. Either we break through this barrier or it will be another faded rally.

Rick Rouse
Rick@OptionsMentoring.com