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Bullish VMware Traders Predict a Major Surge

VMW sees a post-earnings upswing in December call volume

by 10/25/2012 9:36 AM
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VMware, Inc. (NYSE:VMW - 86.25) calls have been popular in the options pits 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 checks in at 2.45, confirming calls bought to open have more than doubled puts during the past two weeks. This ratio is docked in the 66th annual percentile, denoting a stronger-than-usual preference for bullish bets over bearish.

Wednesday's session proved to be no exception, particularly after the company reported stronger-than-anticipated third-quarter earnings. Roughly 10,000 calls changed hands yesterday, which was more than twice the security's average daily call volume. Garnering notable attention was the out-of-the-money December 100 strike, where more than 1,400 contracts traded at a volume-weighted average price (VWAP) of $0.95. What's more, nearly all of these calls crossed at the ask price, suggesting they were bought. Meanwhile, open interest at this strike rose by 1,381 contracts overnight, signaling the initiation of new bullish bets. By purchasing these calls to open, traders are betting on the equity to power north of $100.95 (strike price plus VWAP) by December expiration.

As alluded to earlier, this uptick in call volume is in sync with VMW's broader trend. The equity's Schaeffer's put/call open interest ratio (SOIR) stands at 0.61, conveying calls comfortably outnumber puts among options scheduled to expire in the next three months. This ratio hovers just nine percentage points above a yearly nadir, meaning near-term traders have rarely been more call-heavy toward the stock during the last 12 months.

However, VMW is not completely free of bearish speculation. Short interest on the software issue rose by 29% over the most recent reporting period, and now accounts for about 11% of the equity's float -- or the equivalent of more than four days' worth of pent-up buying pressure, at the stock's average pace of trading. This raises the possibility that some of the aforementioned buy-to-open call volume is the result of hedging activity by short sellers.

Meanwhile, most of the analysts following the equity harbor high expectations for VMW. The security boasts 15 "strong buys" and two "buy" endorsements, versus 11 "holds" and zero "sell" recommendations. Furthermore, even after receiving several price-target cuts on Wednesday, the stock's average 12-month price target still sits at $108.49, reflecting expected upside of almost 27% to yesterday's closing price of $85.67.

Despite Wednesday's 2.3% climb, VMW is still down 11.4% on a year-over-year basis, and has lagged the broader S&P 500 Index (SPX) by more than nine percentage points during the past 20 sessions. Also, yesterday's gain was not enough to push the shares above their 10-day moving average, which has served primarily as resistance for the past month. It remains to be seen if VMW has the technical prowess to add an additional 18% by December expiration, which is the minimum gain needed to secure a profit for Wednesday's December bulls.


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