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Yahoo options in demand amid Microsoft speculation

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CIOL Bureau
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Doris Frankel and Lisa Baertlein

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CHICAGO/LOS ANGELES: Many option investors are betting on more gains in the shares of Web media company Yahoo Inc. amid speculation of a tie-up with Microsoft Corp. and high hopes for continued growth in Web advertising.

Shares of Yahoo gained 4.4 percent to close at $40.91 on the Nasdaq amid a broad market rally.

Investors have been piling into January Yahoo calls, mostly notably the contracts that give them the right to buy the stock at $40 and $42.50 a share within the next several weeks.

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On Tuesday, a combined total of 103,673 Yahoo options traded in the U.S. options market -- dominated by more than 81,000 calls, more than its normal volume of 35,449 contracts, according to market research firm Track Data.

Yahoo options also were busy last week as more than 40,000 of the January calls traded on Friday as traders positioned themselves for an expected move higher in the stock, according to Frederic Ruffy, an analyst at Optionetics, which provides investment education and analysis services.

Analysts said reasons for the heightened interest in Yahoo call options ranged from recent rumors that software company Microsoft Corp. might be seeking to partner or merge with the Internet company, to bullish expectations for the company's upcoming fourth quarter earnings report.

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"The speculative activity in short-term calls might reflect the recent talk about an alliance with Microsoft," Ruffy said.

Such rumors have been rampant since Google Inc. recently fortified its lead in the Web search market by taking a 5 percent stake in Time Warner Inc.'s AOL Internet unit.

On Sunday the Los Angeles Times cited what it called speculation that Yahoo had rebuffed an $80 billion bid from Microsoft as too low.

Representatives from Microsoft and Yahoo each declined to comment.

Microsoft, whose MSN division unsuccessfully competed with Google for the AOL deal, plans to introduce its own Web advertising system worldwide by the middle of this year. Yahoo had been MSN's long-time search advertising provider.

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But some analysts downplayed the rumors, suggesting that the company's upcoming earnings could be behind the recent surge in call and stock activity.

Stacey Briere, chief options analyst at Susquehanna Financial Group, said "one catalyst for the call activity could be (Yahoo) earnings which are scheduled for January 17 after the close.

The revenue and profits at Yahoo and its chief rival Google Inc. have risen with the resurgence of Internet advertising. According to one forecast, Internet advertising rose to more than $12 billion in 2005.

Marianne Wolk, an equity research analyst at Susquehanna, said the Google's investment in AOL may encourage Yahoo and MSN to team up, but said she sees such a tie-up as a "remote possibility".

Wolk added that Web search advertising was very strong in the fourth quarter, coming in "at the high end of expectations."

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