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Are EMC Corporation Bulls Setting Themselves Up for Disappointment?

EMC's May 23 call saw buy-to-open activity on Wednesday

by 4/18/2013 10:58 AM
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Despite EMC Corporation's (NYSE:EMC) recent bout of negative price action, option players have preferred calls over puts of late. In yesterday's session, around 37,000 calls changed hands, compared to roughly 28,000 puts. Speculators eyed a rebound for the struggling stock, and scooped up EMC's May 23 call for a volume-weighted average price (VWAP) of $0.78. Of the 10,401 contracts traded, 58% went off at the ask price, and open interest added 8,975 positions overnight, confirming that a portion of Wednesday's activity was of the buy-to-open variety.

By purchasing the out-of-the-money calls, traders will begin to profit with each step north of $23.78 (strike price plus the VWAP) EMC Corporation takes through the close on Friday, May 17 -- when back-month options expire. This breakeven mark represents expected upside of 5.6% to EMC's current perch at $22.52. Delta for the call is docked at 0.44, or 44%, suggesting a roughly 2-in-5 chance the position will be in the money by expiration.

Wednesday's penchant for calls over puts is nothing new for option traders, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the course of the past 20 sessions, traders on these major exchanges have bought to open 55,015 calls, compared to 32,601 puts, resulting in a call/put volume ratio of 1.69.

Even more telling of this developing trend is the equity's Schaeffer's put/call open interest ratio (SOIR). Since April 1, EMC's SOIR has dropped to 0.71 from 0.87, as near-term call open interest climbed nearly 43%. This ratio ranks in the 3rd percentile of its annual range, implying short-term speculators have rarely been more call-heavy toward EMC.

This bullishly skewed bias is surprising given the stock's technical troubles. In addition to lagging the broader S&P 500 Index (SPX) by more than 10 percentage points over the past 60 sessions, EMC has surrendered north of 12% since hitting its most recent high of $25.65 on March 14. This dreary price action is being continued in today's session, where the stock tagged a fresh 52-week low of $22.35 in early trading.

Fundamentally, EMC Corporation (NYSE:EMC) is scheduled to release its quarterly earnings report before the market opens next Wednesday. The data storage specialist has a mixed history in the confessional, but even a fourth-quarter bottom-line win couldn't help the stock from shedding 4% in the subsequent session. For EMC's first quarter, Wall Street is calling for a profit of 40 cents per share.


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