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VMware, Inc. (NYSE:VMW - 91.73) has been quite popular with call players lately, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the equity's 10-day call/put volume ratio sits at 3.07, confirming calls bought to open have more than tripled puts during the past couple of weeks. This ratio is docked in the 80th percentile of its annual range, meaning traders have been snatching up calls over puts at a faster-than-usual pace.
The same cannot be said for the current session, however. More than 6,500 puts have changed hands so far, more than quadrupling the security's anticipated intraday volume. By contrast, fewer than 500 calls have traded. Most of today's skeptics have targeted the December 85 strike, which has seen nearly 5,600 puts exchanged -- almost all of them at the ask price, signaling they were purchased. Specifically, these out-of-the-money contracts crossed at a volume-weighted average price (VWAP) of $0.92.
Since this option presently holds open interest of just 1,869 contracts -- along with the fact that implied volatility has ticked 3.5 percentage points higher during the course of the session -- it is very likely that new bearish bets are being placed here. In order for traders to realize a profit on these bought-to-open puts, the stock must retreat below breakeven at $84.08 (strike price less the VWAP) by Dec. 21, which is when front-month options expire.
Also of note, short interest on the software concern ramped up by more than 15% during the past two reporting periods, and now accounts for a lofty 13% of VMW's available float. It would take more than a week to unwind the bearish bets, at the stock's average pace of trading. This could mean that some of the aforementioned buy-to-open call volume seen of late is the result of hedging activity by short sellers.
Meanwhile, the majority of analysts covering the stock seem to harbor high expectations for VMW. The security sports 16 "strong buys" and three "buy" recommendations, compared to 11 "holds" and zero "sell" ratings. What's more, Thomson Reuters shows an average 12-month price target of $107.05 for the equity, representing an 18.5% premium to Wednesday's closing price of $90.34.
This optimism among the brokerage bunch is understandable, as the shares have climbed about 10% year-to-date. On the charts, the stock is on pace to close a second consecutive week atop its 10-week moving average, which had acted as resistance since early October. Unless the equity backpedals more than 8% from its current perch within the next couple of weeks, today's put players could find themselves on the losing end of their bearish trade.