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VMware, Inc. (VMW) Option Traders Pay Up for Their Bullish Bets

VMware, Inc. bulls are paying an inflated premium to gamble on a move north of $100

by 6/27/2014 3:02 PM
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Call players are swarming VMware, Inc.'s (NYSE:VMW) options pits this afternoon. At last check, the contracts were trading at more than eight times the average intraday rate, and were outpacing puts by a roughly 6-to-1 margin. Although the equity's January 2015 105-strike call is the most active VMW option today, short-term contracts are also in high demand, per the stock's rising 30-day at-the-money implied volatility (IV), which was last seen up 6.8% at 28.5%.

Specifically, the security's August 100 call has seen notable buy-to-open activity, with traders purchasing the out-of-the-money contracts for a volume-weighted average price (VWAP) of $3.33. Based on this entry price, at-expiration breakeven for today's call buyers is $103.33 (strike plus VWAP), with gains theoretically unlimited on each additional notch north of here. Losses, meanwhile, are capped at the initial premium paid, should VMW remain perched below the century mark at the close on Friday, Aug. 15 -- when back-month options expire.

On the charts, VMW hasn't traded north of $100 since a poorly received outlook and subsequent round of bearish brokerage notes sent the shares tumbling in late April, and at last check, the equity was lingering near $97.57. With roughly 22% of the stock's float sold short, though, a portion of today's call buying at the August 100 strike may be at the hands of shorts hedging against any unexpected upside. Regardless of the motive, speculators are willing to pay a pretty penny for the calls. IV at the OOTM strike is currently inflated relative to VMware, Inc.'s (NYSE:VMW) 40-day historical (realized) volatility (33.5% vs. 19.5%), meaning premium is more expensive than usual, from a volatility perspective.


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