Why It's Time to Buy Call Options On VMware Stock

Both options traders and short sellers have been increasing their bearish exposure to VMware stock

Mar 30, 2017 at 11:12 AM
facebook twitter linkedin


Shares of IT service provider VMware, Inc. (NYSE:VMW) have been charting a path steadily higher over the last 12 months, with the stock boasting an impressive 76% year-over-year lead. This positive momentum took VMW stock to a new annual high of $93.05 on March 20, though the shares have since pulled back to their rising 40-day moving average. Given the bullish implications of this signal -- and the low expectations surrounding VMW both in and out of the options pits -- it may be a prime time to bet on VMware's next leg higher.

vmw stock daily price chart

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, VMW has pulled back to its 40-day trendline eight other times in the past three years. The stock has gone on to average a gain of 3.3% in the subsequent 21-day time frame, and has been positive 86% of the time. Based on the stock's current perch at $92.21, a move of this magnitude would push the shares north of $95 for the first time since September 2014.

Sideline Cash Could Fuel More Gains for VMware Stock

There's plenty of skepticism levied toward the stock, too, which, if unwound, could translate into fresh tailwinds. In the options pits, VMW's 10-day put/call volume ratio of 0.73 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks in the elevated 76th annual percentile. In other words, options traders have bought to open puts relative to calls at a faster-than-usual clip. While it's possible some of this activity has come at the hands of shareholders protecting paper profits against a potential pullback, a capitulation from "vanilla" put buyers could help buoy the shares.

In fact, this pessimism is seen outside of the options pits, too. As VMW stock has rallied in the last 12 months, short sellers have been upping the bearish ante. Specifically, short interest is up 38% year-over-year, and just off a record high. Not only is it impressive that VMW was able to soar under such intense selling pressure, but it would take almost one full month for short sellers to cover their bearish bets, at the stock's average pace of trading. This suggests ample sideline cash is available to help fuel VMW's fire.

Plus, the outperforming equity is long overdue for a round of bullish brokerage attention. Of the 27 analysts covering VMware, 14 maintain a tepid "hold" recommendation. Meanwhile, the average 12-month price target of $92.57 is roughly in line with VMW's present price. Upgrades and/or price-target hikes could draw new buyers to the table. 

VMware Options are Affordable, Historically Speaking

Those looking to bet on more near-term upside for VMware, Inc. (NYSE:VMW) with options are in luck, too. While the stock's Schaeffer's Volatility Index (SVI) of 18% is docked at an annual low, its 30-day at-the-money implied volatility of 18.5% ranks in the 5th percentile of its 12-month range. Summing it all up, low volatility expectations are currently being priced into VMW's short-term options -- a boon to premium buyers.

Don't miss Schaeffer's free weekly stock market forecast. Sign up now for Monday Morning Outlook.

A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earnings guide for Q3 before it's too late!


  
 
Special Offers from Schaeffer's Trading Partners