Schaeffer's Trading Floor Blog

VMware, Inc. (VMW) Puts Popular Amid Uptrend

Low expectations surround outperforming VMW

by 3/27/2014 1:53 PM
Stocks quoted in this article:

Despite VMware, Inc. (NYSE:VMW) sporting an 18% year-to-date gain, option players have been increasing their bearish exposure on the stock of late. At the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), for example, 2,234 puts have been bought to open during the past five sessions, compared to 1,088 calls, resulting in a put/call volume ratio of 2.05.

Incorporating data from the NASDAQ OMX PHLX (PHLX) -- and expanding the time frame to two weeks -- yields more of the same. Specifically, the equity's 10-day ISE/CBOE/PHLX put/call volume ratio has spiked to 2.14 from its month-ago reading of 0.56, and the current ratio ranks in the 97th percentile of its annual range. Simply stated, puts have been bought to open over calls with more rapidity just 3% of the time within the past year.

It's a trend that's especially evident among options slated to expire within the next three months. In fact, VMW's Schaeffer's put/call open interest ratio (SOIR) of 1.74 ranks in the highest annual percentile, indicating short-term speculators are more put-heavy now than at any other time within the past year.

In the front-month series, peak put open interest can be found at the April 100 strike, where 7,210 contracts currently reside. A number of long put positions have been initiated here this month, meaning speculators expect VMware to surrender its perch atop the century mark by the close on Thursday, April 17 -- when front-month options expire. The stock most recently conquered this level on March 4. Given VMW's technical prowess, a portion of this activity could be the result of shareholders picking up protective puts against a potential pullback.

Regardless, if the equity maintains its foothold north of the strike price over the next three weeks, the most the put buyers stand to lose is the initial cash outlay. Per the equity's Schaeffer's Volatility Index (SVI) of 33%, which ranks lower than 67% of similar readings taken in the past year, premium on VMW's front-month options is inexpensive at the moment, from a volatility perspective.

Looking elsewhere reveals this skeptical skew isn't confined to the options pits. Short interest jumped 10.2% over the past two reporting periods, and now accounts for almost one-quarter of VMware's available float. This translates into 18.18 million shorted shares -- or the loftiest amount since June 2008.

As mentioned above, VMW has put in a respectable performance on the charts in 2014. This upward momentum is continuing in today's session, with the shares up 0.4% at $106.03. This positive price action has been noticed by analysts recently -- and from a contrarian perspective, VMW could continue to make headway, should bearish investors follow in the footsteps of the brokerage bunch by migrating to the bullish camp.

Fundamentally, VMware, Inc. (NYSE:VMW) announced yesterday that its Horizon Daas Platform is now equipped with NVIDIA Corporation's (NASDAQ:NVDA) GRID technology. This partnership will "deliver 3D graphics on virtualized desktops and applications delivered through the cloud."

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