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Yesterday was call-heavy for EMC Corporation (NYSE:EMC). Roughly 13,000 calls traded during the course of the session, compared to an expected volume of 11,000 calls, and fewer than 1,500 puts. Still, not all of those calls were of the typical bullish variety.
In particular, EMC's September 27 call garnered notable attention. However, it appears that traders were making neutral-to-bearish bets by selling the contracts to open at a volume-weighted average price (VWAP) of $0.20. Of the 5,608 contracts that crossed the tape, 95% came in at the bid price, and open interest shot up overnight -- confirming our short call theory. Information from the International Securities Exchange (ISE) corroborates this story.
Therefore, rather than hoping for the underlying to rise, yesterday's speculators expect EMC may remain south of the strike price through front-month expiration on Sept. 20. If the stock complies -- and there is a little wiggle room, given its present perch of $25.72 -- the traders will retain the premium received (i.e, the VWAP) for selling the calls. If the underlying rises above the strike, however, the call sellers risk being assigned -- which could be an expensive proposition, since they'll be forced to deliver the shares at $27 each, no matter how high they rise. If these written calls were "covered" by an existing stock position, the shareholders risk sacrificing any gains in the shares north of $27 (through September options expiration), unless they close their positions or roll them to a higher and/or later strike. It is notable, though, that EMC has closed north of $27 just once in 2013.
Options traders in general have been bearish toward EMC Corporation of late, albeit in the more traditional, put-buying sense. At the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open roughly an equal number of puts and calls during the past 10 weeks. Still, compared to the previous 52 weeks, the 50-day put/call volume ratio of 0.99 has never been surpassed, meaning traders are picking up puts over calls at an annual-high clip.
By contrast, the brokerage bunch is bullishly aligned toward EMC. Nearly all of the analysts covering the stock -- 26 out of 28, to be exact -- give it a "buy" or better rating, versus just two "holds" and not a single "sell" or "strong sell" recommendation. What's more, Wall Street's 12-month price target for the equity stands at $30.30 -- representing significant upside relative to where the shares are currently hovering.
On the technical front, EMC Corporation (NYSE:EMC) is an underperformer, gaining just over 1% year-to-date, despite 2013's bull market. Furthermore -- and this should come as music to the ears of yesterday's call sellers -- the stock recently ran into a layer of resistance at $27, which short-circuited the shares' recent charge up the charts.