Options Market Prices in Large Post-Earnings Swing for VMware Stock

A positive earnings report from VMW could surprise several analysts and short sellers

Emma Duncan
Aug 22, 2018 at 2:47 PM
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Shares of VMware, Inc. (NYSE:VMW) are up 1% at $153.18 in afternoon trading, as the tech firm gears up to release its second-quarter report after the market closes tomorrow, Aug. 23. Below we will dive into what the options market is pricing in for the stock's post-earnings moves, as well as how VMW stock has been performing on the charts of late.

VMware stock has been moving higher on the charts, advancing more than 40% since bottoming out near $108 back in February. More recently, the stock bounced off support at the 80-day moving average -- historically a bullish signal -- and is now up 53% year-over-year.

Daily Chart of VMW with 80MA

Looking at VMW's earnings history, the stock has closed higher the day after the company reported in six of the last eight quarters, including a 6.1% surge in early June. During this time frame, the shares have moved 4.4% the day after earnings, on average, regardless of direction. This time around, however, the options market is pricing almost double that -- an 8.2% move -- for Friday's trading.

Digging deeper, the security's Schaeffer's put/call open interest ratio (SOIR) comes in at 1.39, which ranks in the 94th percentile of its annual range. This lofty ratio indicates that near-term VMW options traders have rarely been more put-skewed during the past 12 months. 

Analysts are unconvinced, despite VMW's technical strength. Currently, eight of 21 brokerage firms maintain "hold" or worse ratings. A strong earnings report tomorrow could prompt analyst upgrades.

Lastly, short interest has plunged nearly 30% during the past two reporting periods, but still represents 12.7% of the stock's total available float. At VMware stock's average daily pace of trading, it would take more than eight sessions for shorts to buy back their bearish bets. A positive earnings surprise tomorrow could shake loose more shorts.

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