A smiley can only be inserted into the email body field.
To insert smiley into Yahoo! email, follow these steps:
Click on the "Compose" button.
Make sure you are using the rich text format so that smileys appear properly. If you are not, switch formats by clicking on the "Options link in the top right corner.
If you have installed Crawler Smileys Toolbar, it will notify you if the smiley is unable to insert by displaying a red circle over the Smiley button.
Click on the "General Preferences" link.
In the "Composing E-mails" section select the "Compose messages as color and graphics" option.
Click on the "Save" button in the top left corner.
Click on the spot where you want to insert the smiley (in email body only!).
Click on the Smiley button and select the smiley that you want to insert from the dropdown menu.
If you want to insert a smiley not available in the dropdown menu, click on the "Open Smileys Gallery" button.
If you don't have the Smiley Toolbar installed, you may open the gallery by clicking on the Smiley icon on the Internet Explorer.
When the Crawler Smileys window opens, you may browse the gallery and insert a smiley by clicking on it.