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VMware Speculators Gamble On Short-Term Support

VMW traders sold September 85 puts

by 8/24/2012 9:24 AM
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The shares of VMware, Inc. (NYSE:VMW - 91.24) retreated along with the broader equities market yesterday, ending beneath their 10-day and 20-day moving averages for the first time since July 17. Nevertheless, it looks like a slew of options speculators are betting on limited downside for VMW, as evidenced by yesterday's affinity for short puts.

By the time the dust settled, the tech concern had seen roughly 13,000 puts cross the tape -- nearly twice the number of VMW calls exchanged, and about three times its average daily put volume. Digging deeper, we find that traders opened new positions at the out-of-the-money September 85 put, which saw open interest jump by close to 2,250 contracts overnight. Plus, as alluded to earlier, the majority of the puts changed hands at the bid price, pointing to sell-to-open activity.

By writing the puts to open, the sellers are expecting VMW to remain north of $85 through September options expiration -- which encompasses VMWorld 2012 and the company's analyst day next week. (In fact, as Goldman Sachs Group told clients on Wednesday, these two events have translated into catalysts higher for the shares over the past two years, though the brokerage firm recommended employing long calls to exploit potential upside.) In the best-case scenario, the puts will expire worthless, allowing the traders to retain the entire premium paid at initiation.

Broadening our sentiment scope, it seems options players have been employing puts at a faster-than-usual clip in recent weeks -- but for more traditional, bearish reasons. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day put/call volume ratio of 2.77, indicating that investors have bought to open nearly three VMW puts for every call during the past 10 sessions. What's more, this ratio sits just two percentage points from an annual high, suggesting speculators have rarely initiated bearish bets at a quicker step during the past year.

As a result, the security's Schaeffer's put/call open interest ratio (SOIR) now sits at a 52-week peak of 1.74. Or, in simpler terms, VMW puts haven't outnumbered calls by a wider margin at any other time during the past 12 months.

As we mentioned earlier, the shares of VMW breached double-barreled trendline support yesterday, and are now exploring the $91.24 region. From a longer-term perspective, the equity has struggled to surmount its 10-week and 32-week moving averages, which have stalled VMW's rally attempts since early May.

Weekly Chart of VMW since April 2012 With 10-Week and 32-Week Moving Averages


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