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EMC Speculator Predicts an Extended Pullback

Breaking down a long-term debit spread on EMC

by 12/31/2012 12:13 PM
Stocks quoted in this article:

Since running into a wall in the form of its 200-day moving average, EMC Corporation (NYSE:EMC - 24.90) has shed about 4.9%. What's more, it looks like one options trader may be expecting more long-term downside for the tech concern, and is employing both puts and calls to simulate a short sale.

Specifically, EMC has already seen roughly 7,000 puts and 6,700 calls change hands today, far surpassing its average intraday volume of about 2,100 puts and 2,500 calls. Most of the action has centered on the July 25 put and July 26 call, which saw symmetrical blocks of 5,000 contracts cross the tape.

The puts traded at the ask price of $2.12, suggesting they were bought, while the calls crossed at the bid price of $1.62, implying they were likely sold. Since volume has exceeded open interest at both strikes, it appears the investor implemented a split-strike version of the synthetic short stock strategy for a net debit of $0.50 per pair of contracts.

Like a short seller, the trader is hoping EMC extends its recent downturn on the charts. In order to profit on the play, the strategist needs the stock to breach the $24.50 level (put strike minus net debit) within the next seven months. In this case, the bought puts will remain in the money, while the calls -- sold to partially fund the puts -- will remain worthless.

Furthermore, the net debit of $0.50 represents the maximum risk, as long as EMC remains south of the $26 level. Should EMC rebound north of $26, the sold calls will move into the money, and the trader could be forced to sell EMC shares for $26 apiece -- a discount to what he'd get on the Street.

From a broader sentiment standpoint, bearish betting is par for the course for EMC. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day put/call volume ratio stands at a 52-week high of 1.44. Or, in simpler terms, option speculators have bought to open EMC puts over calls at an annual-high clip during the past couple of weeks.

Likewise, the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.12 registers in the 67th percentile of its annual range. In other words, EMC's near-term options traders are more put-heavy than usual at the moment.

At last check, EMC has added 0.3% to wink at the $24.90 level. For the year, the stock has advanced more than 15%.


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