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EMC Flooded By Front-Month Option Buyers

EMC speculators are placing pre-earnings bets

by 1/28/2013 1:11 PM
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Option traders are flocking to EMC Corporation (NYSE:EMC - 25.16) today, with speculators gambling on the stock's post-earnings trajectory. In early afternoon trading, the tech concern has already seen about 16,000 calls and 12,000 puts change hands, roughly doubling its average intraday volume of fewer than 8,500 calls and 5,700 puts.

Both bulls and bears are targeting EMC's front-month options, which are still relatively cheap, despite the company's looming turn in the earnings spotlight tomorrow morning. In fact, the equity's Schaeffer's Volatility Index (SVI) of 24% stands higher than less than a quarter of the past year's worth of readings, suggesting front-month option premiums are comparatively inexpensive right now.

On the bulls' side, speculators are scooping up the February 26 call, which has seen close to 5,600 contracts cross the tape at a volume-weighted average price of $0.31. The majority of the calls have traded at the ask price, and implied volatility (IV) was last seen 4.9 percentage points higher, hinting at buy-to-open activity. By purchasing the calls to open, the buyers expect EMC to surmount the $26.31 level (strike plus VWAP) within the next couple of weeks.

On the bears' side, traders have taken a shine to EMC's February 22- and 24-strike puts, which have seen about 3,000 and 2,300 contracts traded, respectively. IV on the 22-strike put was last seen 3.5 percentage points higher, while IV on the 24-strike put is up 3.6 percentage points, pointing to newly opened positions. Plus, the majority of the puts have changed hands at the ask price, once again suggesting buyer-driven volume.

By purchasing the February 22 puts for a VWAP of $0.04, the buyers will make money if EMC breaches the $21.96 level (strike minus VWAP) by the closing bell on Friday, Feb. 15. Meanwhile, the VWAP of the February 24 puts is $0.24, indicating a breakeven level of $23.76 for the buyers. However, even if EMC remains north of the strikes, the most the buyers can lose is the premium paid at initiation.

Expanding our sentiment scope, we find that most short-term options players are in the bearish camp. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.19 stands just 6 percentage points from a 52-week peak, implying that near-term speculators have rarely been more put-skewed during the past year.

Judging by data from the major options exchanges, though, that sentiment tide could be shifting. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), investors have bought to open more than five EMC calls for every put during the past 10 sessions. What's more, the equity's 10-day call/put volume ratio of 5.31 ranks in the 80th percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets over bearish.

At last look, EMC has surrendered 0.4% to explore the $25.16 level. From a longer-term perspective, the security has spent the past 16 months embarking on a series of higher lows, with recent rally attempts halted by its 10-month and 20-month moving averages.

Fundamentally, the company fell short of Wall Street's bottom-line earnings projections in each of the past two quarters, according to Thomson Reuters. This go-round, analysts, on average, are anticipating a per-share profit of 52 cents for EMC.


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