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Bullish Dell Traders Expect a Surge by Spring

Speculators take a chance with DELL's May options

by 10/4/2012 10:15 AM
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The shares of Dell Inc. (NASDAQ:DELL - 9.43) drifted almost 5% lower yesterday, after sector peer Hewlett-Packard Company (NYSE:HPQ) revealed lower-than-expected full-year guidance. However, bullish options players remained undaunted, as roughly 24,000 calls crossed the tape, which was double the equity's average daily volume.

Most popular was the out-of-the-money May 2013 11 strike, where more than 6,000 calls changed hands at a volume-weighted average price (VWAP) of $0.46 per contract. Nearly all of these calls traded at the ask price, suggesting they were bought. Open interest at this strike surged by more than 5,900 contracts overnight, indicating that most of the volume was comprised of new positions. In order for speculators to secure a profit on these bought-to-open calls, the security will need to muscle north of $11.46 (strike plus VWAP) by the time May-dated options expire.

This preference for calls over puts is hardly unusual for DELL, as reflected by the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 6.20 -- confirming that traders have bought to open more than six calls for every put during the last couple of weeks. In fact, this ratio ranks higher than 97% of all other readings taken within the past year, meaning speculators have been snapping up calls over puts at an almost annual-high pace.

Likewise, the Schaeffer's put/call open interest ratio (SOIR) for DELL checks in at 0.55, conveying that calls nearly double puts among options with a shelf life of three months or less. This ratio is docked at a yearly nadir, signaling that near-term traders are more call-heavy toward the stock now than at any other time during the past 52 weeks.

Elsewhere, short interest on the tech issue rose by 12% over the past two reporting periods, and now accounts for 3.5% of DELL's available float. This could mean that some of the recent buy-to-open call volume is the work of short sellers seeking to hedge their bearish bets.

The majority of analysts following DELL seem to maintain a cautious view of the stock, which sports 11 "buy" or better suggestions, compared to 14 "holds" and one "strong sell." However, the security's average 12-month price target sits at $14.03, representing a 49% premium to Wednesday's closing price of $9.43.

DELL has had a rough go of it on the charts lately, considering the equity's year-over-year decline of approximately 39%, as well as its year-to-date loss of about 35%. A look at the charts shows that the stock continues to trade below its 10-day and 20-day moving averages, which have served as resistance since an earnings-induced bearish gap on Aug. 22. What's more, the security tagged a new multi-year low of $9.35 this morning, suggesting that the company's struggles are far from over.

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