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EMC Corporation Traders Forecast a Fundamental Folly

EMC's May 19 put is being targeted in today's session

by 4/22/2013 11:45 AM
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Traders in EMC Corporation's (NYSE:EMC) options pits are hoping history repeats itself when the company steps into the earnings confessional on Wednesday, and are picking up the stock's May 19 put in today's session. Nearly all of the 5,091 contracts traded have changed hands at the ask price, and only 41 contracts currently reside here, making it safe to assume that new bearish positions are being created.

These out-of-the-money puts are being purchased for a volume-weighted average price (VWAP) of $0.17. In other words, speculators will begin to profit with each step south of $18.83 (strike price less the VWAP) EMC takes through the close on Friday, May 17, which is when front-month options expire. This breakeven mark represents expected downside of 13.4% to the stock's current price of $21.75. Risk, meanwhile, is limited to the initial cash outlay.

Option traders must be pretty confident in their bearish bets, as implied volatility at the strike is currently inflated relative to the stock's 20-day historical (realized) volatility (40% vs. 19.9%). Simply stated, premium for this short-term option is relatively expensive heading into this week's scheduled announcement.

Despite the stock's dreary 13.8% year-to-date decline, sentiment surrounding EMC has tended toward the bullish side of the aisle. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 65,988 calls during the past 20 sessions, compared to 35,468 puts, resulting in a call/put volume ratio of 1.86.

As such, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.41 ranks in the lowest percentile reading of its annual range. What this means is that short-term speculators are more call-heavy now toward EMC Corporation than at any other time within the past year. This withstanding trend has translated to heavy accumulations of call open interest in the front-month series at the May 23 and 24 strikes. Going forward, EMC could find some options-related resistance at these overhead marks, as the hedges related to the bets begin to unwind ahead of expiration.

Technically, EMC has struggled on the charts in recent months, as evidenced by the aforementioned year-to-date deficit. Additionally, the stock has underperformed the broader S&P 500 Index (SPX) by more than 17 percentage points over the past 60 sessions.

Fundamentally, the data storage specialist will unveil its first-quarter earnings report before the market opens on Wednesday. EMC Corporation (NYSE:EMC) has a mixed history in the confessional, besting analysts bottom-line expectations in two of the past four quarters. However, the stock shed 4% the first day after a first-quarter profit win in late January. For EMC's first quarter, Wall Street has forecast earnings of 40 cents per share.


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