EMC Corporation (EMC: sentiment, chart, options) was on the ropes during the last few months of 2008, with the stock suffering several dips into single-digit territory. However, the shares have battled back from their late-November low near the $8.50 level, and now boast a respectable year-to-date gain of 13.8%.
In fact, the equity's positive momentum has pulled its 10-week and 20-week moving averages into a bullish cross, which hints at the possibility of additional upside. Looming directly overhead, though, is EMC's 40-week moving average. This trendline rejected the stock's rally attempts in May and September 2008, and could prove a difficult technical hurdle to surmount.
Despite this roadblock, option players on Tuesday gravitated toward EMC's call options. On the International Securities Exchange (ISE), traders bought to open 4,284 calls, compared to just 2,841 puts. The stock's single-day call/put ratio was 1.51, with bullish bets outpacing their bearish counterparts.
While calls may be more popular than puts on EMC, it's all relative -- recent option volume actually reveals a pessimistic slant among speculative investors. The stock's ISE 10-day put/call ratio of 0.71 ranks higher than 76% of other such readings taken during the past year, indicating that bets on EMC's decline have been more popular than usual during the past 2 weeks.
Likewise, the stock's Schaeffer's put/call open interest ratio (SOIR) is 0.86, with calls outnumbering puts among near-term options. This SOIR ranks higher than 88% of comparable readings during the past 52 weeks, underscoring the elevated levels of skepticism among option traders.
Meanwhile, short sellers have hit the exits. The number of EMC shares sold short fell by 14.2% during the most recent reporting period, and now accounts for a slim 2.3% of the equity's available float. This figure represents the lowest short-to-float ratio for EMC in a year, suggesting that the shorts have been forced to close out their bets in response to the stock's recent gains -- perhaps in favor of less-risky put options?
Whatever the case, both put and call players have placed their bets very close to the equity's current trading range. Peak call open interest of 21,076 contracts lies at the February 12 strike, while peak put open interest of 21,464 contracts is docked at the February 11 strike. With the shares trading just fractionally above 12 at last check, these heavy accumulations of open interest could keep the stock pinned between these 2 strikes as expiration draws closer.
While EMC may remain in a tight trading range through options expiration next Friday, traders should take note of the very real threat posed by the stock's 40-week moving average. Once this trendline collides with the shares, it could very well result in a pullback to unproven support at their 10-week moving average.
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