Thursday, July 31, 2008

Bottoms up?

Some very interesting options action in EMC yesterday. Seventeen times the normal volume in options trades, with a 3.5-to-1 ratio of calls to puts. Some very large institutional buyer was snapping up huge blocks of the Aug 15 calls...which means they believe very strongly this stock is going to be above $15 in just three weeks. And no one seems to know why! There was no public news on EMC yesterday. Insider information, anyone? At least I'm on the right side of this trade, I doubled down on my holding around $13 a few days ago, so maybe I can finally start to make a little money back after a horrific year so far.

Meanwhile, Cramer called the bottom of this bear market yesterday, on the one year anniversary of his amazingly prescient rant against Ben Bernanke and the Fed. If we get any kind of buying opportunity today, it's not a bad time to pick some extra Goldman or GE. Jim was also big on Research in Motion but I might have to pass, since I recently added both EMC and CSCO.

Watched The Dark Knight again last night, and it was just as good as the first time.


At 12:55 PM, Blogger MarkRebuck said...

No need for public news or insider information to figure out why EMC is in play: August 15th is the one year anniversary of VMWare's spinoff IPO from EMC. If you read the filings from both EMC and VMWare, you'll see a crazy amount of coupling between the two companies.

I still can't sort out the math about who-owns-what, and I've spent a good chunk of time trying to do so. But given that EMC owns most of VMWare, VMWare's market cap is 50% of EMC's, and a HUGE chunk of VMWare options are going to vest on August 15th, I'm not surprised to see strange things happening on the EMC options market. My guess is that a large number of EMC shares are going to convert to VMWare, then get dumped shortly before VMWare employees hit their first round of vesting on August 15.

How to play it? I don't have a clue. Doubling down your EMC holdings at 13 is a bold move. When I ran the numbers (which, as I mentioned above, still leave me confused), I walked away thinking about VMWare September Puts. I'm probably going to sit this one out. I have a horrible track record playing "one year after IPO" bets :-).

At 12:12 PM, Blogger Sweet Tea said...

EMC owns 80% of VMWare, so the two companies are closely tied. Much of EMC's decline over the past year can be attributed to disastrous numbers at VMWare. I appreciate the info about the options vesting, although I don't understand how that would make EMC shares go up...

It gives me an idea though...this is probably a great spot for a pairs trade. I like EMC as a company anyway, definitely long-term and possibly shorter term too after seeing this call interest, so why not pick up EMC common to go along with your VMWare puts? It gives you exposure to a good company while protecting you against the downside of a toxic investment...and just in case there's an announcement coming about EMC divesting part of its VMWare share, you could win both ways.

At 4:13 PM, Blogger MarkRebuck said...

>I don't understand how that
>would make EMC shares go up...

Neither do I. That's my point.
I think bullishness over the low put/call ratio on EMC is misplaced. I'm bulling on EMC long term, but the recent option action isn't a contributing factor.

Your original post mentioned "interesting options action", but the low put/call ratio is fully explainable when you consider the impact of the upcoming VMW vesting. My guess is that EMC is buying at-the-money call options to hedge against the VMW vesting. If the stock tanks, the option vesting will cost EMC less. If the stock goes up, the call options will take away the sting. Buying a pile of at-the-money call options is a sensible way for EMC/VMWare to manage their risk. Of course, we don't know if it was EMC buying the August calls... but it would make sense.

August Option Chain for EMC
shows the calls centered at 14.94, and the puts centered at 13.66. The September chain looks similar. This strikes me as neutral or slightly bearish given the current 15.03 closing price.

(Your suggestion to buy EMC common and VMW puts does sound interesting, but I'm still going to sit this one out. I don't have the stomach to handle any more volatility this year :-))


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