Yahoo option traders bet on Microsoft deal

By Doris Frankel

CHICAGO (Reuters) - Option investors bet heavily on Monday that Yahoo Inc might strike a deal of some sort with Microsoft Corp, spurred on in part by pressure from activist shareholder Carl Icahn.

Microsoft has proposed an alternative deal for Yahoo, a complex transaction that would include just buying Yahoo's search business, rather than a full buyout, a person familiar with the discussions said on Monday.

As part of the deal, Microsoft would also buy a minority stake in what remains of the company after Yahoo sells its Asian assets, the source said.

Representatives of software giant Microsoft and Yahoo, the No. 2 U.S. search engine after Google Inc, declined to comment.

"The question now is what form this deal will take," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Inc in Chicago. "During Monday's (option) trading, the perception was that this deal would get done at $30 (per share) or better."

Microsoft said it proposed an alternative deal to Yahoo over the weekend, rather than a full acquisition of Yahoo as it had originally proposed.

Yahoo shares rose almost 2 cents to close at $27.68 on Nasdaq. In the U.S. options market, roughly 169,000 calls and 163,000 puts traded in Yahoo, below its average daily volume 430,000 contracts, according to option analytics firm Trade Alert.

But a large part of the put volume was mainly due to more than 57,000 lots traded in the July $27.50 puts, which might have been sold as part of a large spread or a closing trade, both of which are typically perceived as bullish transactions.