An unusually large options trade in Yahoo Inc  on Tuesday piqued interest among market players because it signaled that at least one big investor doubts that a potential Yahoo takeover would carry a large premium.

Yahoo call options, which give the right to buy the stock, were active one day after Microsoft Corp said it would be willing to reopen talks to buy part or all of Yahoo if dissident investor Carl Icahn was successful in replacing the board of the Internet media company.

With Microsoft back as a potential bidder, Yahoo shares rose 73 cents, or 3.05 percent, to $24.64 on Nasdaq.

The large trade had all the earmarks of a long 1x2 call spread. It involved two large blocks of the October Yahoo $25 and $27.50 strikes and was done at the same time Tuesday morning on the all-electronic International Securities Exchange, said Jon Najarian, a founder of Web information site optionmonster.com.

An investor bought 70,000 contracts at the $25 call strikes at $2.28 each and sold 140,000 lots at the $27.50 strike for $1.19 in a ratio of 1 by 2, resulting in a 10-cent credit, analysts said.

In this case, the strategist is looking for Yahoo shares to trade above $25 by October but no higher than $27.50, said Michael Schwartz, chief options strategist at Oppenheimer & Co Inc.

Schwartz noted the trade reflects an expectation that a deal for all or part of Yahoo will result in the stock trading between $25 to $27.50.

"Even at $27.50, this is a far cry from Microsoft's original offer for Yahoo at $31," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

The maximum potential profit for the trader occurs if Yahoo shares close at $27.50 by October options expiration, in which case the trader stands to pocket some $18.2 million, Darst said.

She also said the spread trade does not imply much premium in the event of a new Microsoft offer and that the investor may be betting on only a partial takeover, or no deal at all.

Microsoft's initial unsolicited takeover bid was a half-cash, half-stock offer of $31 per share. Microsoft later raised it to a $33 per share bid.

Collectively, the large trade represents 21 million shares of Yahoo. "The trader is betting on a modest rise in Yahoo shares if a deal occurs but not more than 11 percent from where Yahoo shares closed on Tuesday," Najarian said.

Source:reuters