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Option Traders Bet Against an EMC Corporation (EMC) Breakout

Short-term call sellers are skeptical EMC Corporation will rally past $29

by 3/31/2014 1:52 PM
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Option Brief: EMC Corporation (NYSE:EMC) calls are trading at nearly double the usual intraday rate. What's more, calls outnumber puts by a count of roughly 10-to-1. Of the 20,000 calls exchanged so far today, nearly 90% have transpired at the May 29 strike.

Delving deeper into the details, we notice that the vast majority of the 17,851 contracts traded at the aforementioned strike crossed during a multi-exchange sweep, just before 11 a.m. ET. Ninety-four percent of the total volume changed hands at the bid price, volume outpaces open interest, and data from the International Securities Exchange (ISE) confirms sizable sell-to-open activity at EMC's May 29 call.

By writing the out-of-the-money contracts to open, the traders are betting against EMC shares rising from their current perch at $27.50, past the strike price, by the closing bell on Friday, May 16, when the options expire. Looking back, the tech stock hasn't topped $29 since April 2012.

If that trend holds up over the next seven weeks, the contracts will expire worthless, and the call writers will secure the initial premium received as their maximum potential reward. However, if EMC breaks with history and charges above the strike, the writers could be assigned, and forced to sell the shares for $29 apiece, no matter how much they've rallied.

Within the option's lifetime, EMC Corporation (NYSE:EMC) is scheduled to report first-quarter earnings -- specifically, after the close on Wednesday, April 23. The company has met or exceeded analysts' bottom-line estimates in five out of the past eight quarters. On average, however, the shares have slipped 0.7% in the week after the news, and more recently, 6.8% in January. Also on the fundamental front is the firm's annual meeting of shareholders, slated for Wednesday, April 30.


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