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Bulls Flock Toward Dell Ahead of Earnings

Call players eye DELL's December series options

by 11/13/2012 9:44 AM
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With quarterly earnings quickly approaching, Dell Inc. (NASDAQ:DELL 9.30) received some bearish analyst attention Monday morning. Specifically, Barclays lowered its price target to $11 from $13, while Raymond James cut its price target to $14 from $16. Nevertheless, bullish traders swooped down on the equity yesterday, as roughly 44,000 calls crossed the tape during the course of the session. This was more than four times the norm, and nearly eight times the number of puts exchanged.

A number of speculators took a shine to the December 10 strike, where close to 7,700 calls changed hands at a volume-weighted average price (VWAP) of $0.21 per contract. Nearly all of these near-the-money contracts traded at the ask price, pointing to buyer-fueled activity. This strike saw an overnight rise in open interest of 6,396 contracts, making it safe to assume that new positions were initiated here. This option is now home to peak December call open interest of 8,769 contracts. By purchasing these calls to open, traders are expecting the equity to rise north of $10.21 (strike price plus VWAP) by the time December options expire.

This preference for calls over puts is in keeping with DELL's latest options trend. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 50-day call/put volume ratio of 3.05, confirming traders have bought to open more than three calls for every put during the last few months. This ratio ranks higher than 98% of other such readings collected within the past year, meaning speculators have been snapping up bullish options over bearish at a near annual-high clip.

As a result, Schaeffer's put/call open interest ratio (SOIR) for DELL checks in at 0.84, with calls outnumbering puts among options with a shelf life of three months or less. This ratio arrives in the 25th percentile of its annual range, indicating short-term options players have been more call-heavy toward the stock just one-fourth of the time during the last 12 months.

Echoing yesterday's downbeat analyst attention is the fact that most of the brokerage firms covering the computer giant maintain a cautious outlook toward DELL. The equity sports 10 "strong buys" and one "buy" rating, compared to 14 tepid "holds" and one "strong sell" suggestion.

DELL has been a technical laggard lately, shedding 39% during the past year, and 36% year-to-date. What's more, the stock remains pinned beneath its 20-day moving average, which has acted as resistance since Aug. 22 -- when the stock suffered an earnings-related bearish gap.

Speaking of earnings, DELL is scheduled to report fiscal third-quarter earnings this Thursday, and has fallen short of consensus bottom-line estimates in two of the past four quarters. Yesterday's call players may be hoping for an earnings surprise to the upside, which could provide a tailwind for the stock -- thus lifting their bullish bets in the money.


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