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EMC Corporation (EMC) Bulls Won't Throw in the Towel

Long-term long calls popular on EMC today

by 5/3/2013 12:23 PM
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EMC Corporation (NYSE:EMC) has been less-than-impressive on the charts of late, but that hasn't slowed down bullish betting among options players. In the last 10 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more than 56,000 calls have been bought to open, versus fewer than 12,000 puts. The resultant 10-day call/put volume ratio of 4.80 is higher than 82% of all comparable readings over the past year.

More of the same has continued today, with one trader zeroing in on the January 2014 26-strike call. One block of 7,000 contracts traded at this out-of-the-money strike earlier today, crossing at the ask price of $0.92 per contract. Given that this volume easily exceeds existing open interest of 512 contracts, it is safe to assume these bullish bets were purchased to open.

Panning out to expiration in more than seven months, the call will be profitable if EMC Corporation is trading above $26.92 (strike price plus debit paid). For now, the option will add 34 cents for every $1 the underlying stock gains, based on the current delta reading of 0.34. This indicator also points to a 34% chance the option will expire in the money. If the shares fail to make a move higher, the call buyer stands to lose 100% of the premium paid, which is a total of $644,000 for this particular transaction (7,000 * $0.92 * 100 shares).

Currently trading at $23.49, EMC has not been north of the $26.92 level since mid-October (and since then, the shares have been drifting below resistance at their 10-month moving average). The shares have dropped roughly 16% in the last year, are down close to more than 7% in 2013, and what's more, EMC has lagged the tech-centric Nasdaq Composite (COMP) by nearly 19 percentage points since the beginning of the year.

Aside from some front-month put buying that occurred shortly before earnings, EMC has remained a favorite among the short-term options crowd as well. Schaeffer's put/call open interest ratio (SOIR) for EMC stands at 0.38, meaning calls expiring in the next three months trump puts by a margin of nearly 3-to-1. Also, this ratio is 2 percentage points shy of an annual nadir, indicating that calls have rarely been so popular during the last year, in spite of the equity's technical troubles.


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