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VMware, Inc. (VMW) Option Trader Braces for Big Moves

VMware, Inc. was targeted for a protective options spread on Monday

by 7/22/2014 10:44 AM
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Option activity surged on VMware, Inc. (NYSE:VMW) yesterday, with nearly 9,600 calls and 5,700 puts changing hands -- roughly tripling average daily volume levels for the tech stock. A single spread trade drove a healthy portion of the volume on both the call and put sides of the aisle for VMW, as one investor implemented a protection play on the shares.

Right around midday, a block of 2,000 September 85 puts was bought to open at $2.40 per contract, while a block of 1,600 September 110 calls was simultaneously sold to open at $1.55 per contract. At the time, VMW was perched at $94.36, in between the two strikes. In other words, this looks like the initiation of a protective collar spread on the stock. The trade was initiated for a net debit of $232,000 -- which is also the maximum possible loss, should the purchased puts expire worthless.

Based on the number of puts involved, this VMW collar is sufficient to hedge a 200,000-share stake in the data virtualization specialist. However, since just 1,600 calls were sold, the trader would face the possibility of only 160,000 VMW shares being called away, should the stock rally north of $110 prior to expiration. This spread player may have been looking to cut the cost of entry on protective puts, while simultaneously guaranteeing exposure to additional upside if the shares should skyrocket during the next couple of months.

There are a couple of reasons VMW investors might be looking to hedge their bets. The company is due to report second-quarter earnings after tonight's closing bell, and the stock's one-week post-earnings returns have varied widely over the last eight quarters -- ranging from a 20.7% drop in early 2013 to a 15.8% rally last summer. Separately, reports yesterday suggested that Elliott Management Corp. will make a push for EMC Corporation (NYSE:EMC) to spin off its 80% interest in VMW.

In today's trading, VMW is up 3.4% at $96.07, moving higher from support at its rising 40-week moving average. On a year-over-year basis, shares of VMware, Inc. (NYSE:VMW) have gained roughly 35%.


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