1:10PM EST

It looks like Microsoft (MSFT, $27.82, down $0.15) and Yahoo (YHOO, $22.43, up $0.98) are crying “wolf” again. Yahoo was getting spanked earlier in the session after a downgrade out of Thomas Weisel Partners. The stock was headed below $20 after the firm said Yahoo’s “outlook remains cloudy at best and potentially could worsen.” Well, it appears the sun came out quickly after the downgrade as reports have surfaced that both parties are back at the negotiating table.

Volume in the Yahoo July 22.50 calls (YHQGX, $0.80, up $0.03) is picking up steam and could easily double on the news. They were trading for 55 cents before the rumor broke. Be careful because there are conflicting reports saying there is no deal in place. The July 22.50 puts (YHQSX, $1.50, down $0.23) are also active and could get some heavy action as traders line up on both sides of the fence.

Rick Rouse