Schaeffer's Trading Floor Blog

EMC Corporation (EMC): Option Traders Optimistic Ahead of Earnings

EMC will report fourth-quarter earnings ahead of next Wednesday's open

by 1/24/2014 10:26 AM
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For a stock that's barely budged on the charts in recent years, EMC Corporation (NYSE:EMC) has seen a rush of bullish option activity of late. At the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), for example, speculators have bought to open 17,607 calls during the past five sessions, versus just 1,650 puts, resulting in a top-heavy call/put volume ratio of 10.67.

Further evidence of a growing bullish bias is seen in the stock's 10-day ISE, CBOE, and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 13.20, which is up significantly from its Jan. 2 reading of 1.89. What's more, the current ratio ranks in the 96th percentile of its annual range, meaning calls have been bought to open over puts at a faster pace just 4% of the time within the past year.

As touched upon, though, EMC has been pretty stagnant on the charts for some time now, which makes this optimism among option traders a little puzzling. In fact, since September 2010, the stock has been bouncing between $20 and $30. Plus, although EMC Corporation has added about 13% since hitting a mid-December low of $23.15, its current price of $26.10 is right in the middle of this longer-term range.

In light of this not-so-dynamic technical showing, a portion of the recent call buying activity -- particularly at out-of-the-money (OOTM) strikes -- could be the result of short sellers picking up hedges on their bearish bets. (As it turns out, at present levels, the 117.33 million shorted EMC shares, or 5.7% of the stock's float, is at its loftiest level since February 2012.) In the front-month series, specifically, call buyers have purchased more than 14,900 contracts at the OOTM February 27 strike since the start of January.

Regardless of the motive behind the recent increase in call buying, premium on EMC's short-term options has been on the rise, as the company prepares to tell all in the earnings confessional before the market opens next Wednesday. Since Jan. 2, the equity's Schaeffer's Volatility Index (SVI) has edged up to 0.24 from 0.19, and is lingering near levels last seen in late October, when the company was preparing to unveil its third-quarter earnings report.

Fundamentally, analysts are calling for a profit of 59 cents for EMC Corporation's (NYSE:EMC) fourth quarter -- a 5-cent improvement over its year-ago results. Historically speaking, the company has matched or exceeded consensus estimates in five of the past eight quarters, resulting in an average gain of 0.3% and 1.4% in the subsequent day and week.

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