(NYSE:EMC) has lost nearly 6% of its value in 2013, but option traders placed a large bet Wednesday that this downtrend will soon reverse course. During the course of the session, nearly 16,000 calls traded at the June 24 strike, nearly all of which crossed at the ask price. Open interest surged by 12,800 contracts overnight, pointing to buy-to-open activity.
Digging in, more than half of this volume traded in one large block, when a lot of 8,826 contracts was executed at the ask price of $0.25, or a total value of nearly $221,000 for the block ($0.25 per option contract * 100 shares per contract * 8,826 contracts). Panning out further, the volume-weighted average price for this call yesterday was $0.26.
Looking ahead to expiration on June 21, these calls are a bet that EMC will rally from its current price of
$23.80 to above breakeven of $24.26 (the strike price plus the VWAP). For the call buyer who traded the aforementioned block, his breakeven price at expiration is $24.25 (strike plus premium paid). Delta on this call is currently 0.50, meaning the options market is pricing in a 1-in-2 chance of an in-the-money finish.
These call buyers aren't the only ones holding an optimistic outlook
toward EMC. Short-term options players have rarely been more call-focused, as evidenced by the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.51, which is lower than 93% of all similar readings taken over the past year.
Moreover, 22 of the 27 analysts following the IT concern rate it a "buy" or better, even while the stock has underperformed the broader S&P 500 Index
(INDEXSP:.INX) by 13 percentage points over the last two months. Should they finally decide to downgrade the equity, it could spur selling pressure in the shares.
On the charts, EMC recently notched an annual low of $21.45 and is wedged beneath its 10-month moving average, which has acted as resistance since last October.
Today, the July 25 call is in focus, with nearly 17,500 contracts trading hands off the bid price. As volume outpaces open interest, it is possible these out-of-the-money bets are being sold to open as part of a covered call
This article by Beth Gaston was originally published on Schaeffer's Investment Research.
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