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Calls have emerged as the options of choice on VMware, Inc. (NYSE:VMW - 78.13) today, as option traders bet on a bounce for the struggling stock. By the numbers, around 2,650 calls have crossed the tape, compared to fewer than 2,000 puts. The most active strike so far is VMW's March 82.50 call, which has seen more than 1,100 contracts trade. The majority of these have gone off at the ask price, implied volatility has ticked higher, and volume is outstripping open interest, suggesting new bullish positions are being initiated.
By buying these out-of-the-money calls to open for a volume-weighted average price (VWAP) of $1.46, traders will begin to profit with each step north of $83.96 (strike price plus VWAP) VMW takes through the close on Friday, March 15, when back-month options expire. This breakeven mark represents a 7.5% premium to present levels.
Today's bullishly skewed bias is just more of the same in VMW's options pits, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the course of the past 10 sessions, traders have bought to open 29,434 calls on VMW, compared to 11,085 puts. The resultant call/put volume ratio of 2.66 ranks higher than 75% of other such readings taken in the last year, indicating calls have been accumulated over puts at a quicker-than-usual pace in recent weeks.
Echoing this trend is the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.56, which shows that calls outweigh puts by a nearly 2-to-1 margin among options expiring in three months or less. What's more, this ratio ranks in the 2nd percentile of its annual range, implying short-term speculators have rarely been more call-heavy toward VMW.
This recent campaign for calls is a bit surprising when looking at VMW's technical backdrop. In addition to underperforming the broader S&P 500 Index (SPX) by 20 percentage points during the past two months, an ill-received earnings report in late January caused the stock to drop 21.5% in a single session. VMW was able to find a foothold atop the $76 mark, an area that previously served as support in mid-to-late 2011.
Should the stock continue to endure technical challenges through March expiration, the most today's call buyers have risked is the initial premium paid. With implied volatility at the March 82.50 call currently deflated relative to the stock's 40-day historical (realized) volatility (29% vs. 64.7%), traders can rest easy knowing the premium they paid was relatively inexpensive.