Options Update: Simulating a Long Stock Position on EMC Corporation


EMC Corporation ( EMC ) was popular in the options pits on Wednesday, as the shares of the tech titan rallied to a new annual high . In fact, one long-term trader is expecting the security to continue its journey into the black through rest of the year, and hopes to capitalize on the upward trajectory without actually owning the shares.

Yesterday afternoon, a block of 1,000 January 2011 21-strike calls changed hands for the ask price of $1.54 per contract, suggesting they were bought. At the same time, a symmetrical block of January 2011 21-strike puts crossed the tape for the bid price of $1.92 per contract, implying they were likely sold. As such, it appears we've unraveled a synthetic long stock position for a net credit of $0.38 per pair of contracts.

As you may have guessed, a synthetic long stock position is established by simultaneously buying calls and selling an equal amount of puts at the same strike with the same expiration. The primary appeal of this strategy is leverage, as the options trader can reap greater rewards than someone spending the same amount of money to buy the underlying shares outright.

Like a straight stock purchase, the synthetic position becomes more profitable as the stock climbs higher on the charts. More specifically, should EMC continue north of the $21 level through January 2011 options expiration, the 21-strike puts will expire worthless, while the 21-strike calls will gain intrinsic value.

However, the synthetic position - like a regular stock position - can also incur hefty losses in the event of a significant decline. For example, should EMC tumble to the $18 level before the LEAPS expire, the long 21-strike calls would expire worthless, while the short 21-strike puts would cost the trader at least $3 apiece to repurchase, resulting in a loss of $2.62 ($3 - initial credit of $0.38) per pair of options.

Technically speaking, EMC's rally north of the $20 level yesterday proved that the stock could hold its own against round-number resistance, as the $20 region hadn't been breached since late 2007. However, while the security has a clear-cut ally in its 10-month moving average, one potential concern is a lack of buyers on the sidelines to drive the stock even higher.

Monthly chart of EMC since November 2007

For starters, EMC's Relative Strength Index ( RSI ) currently rests at 65, on the verge of "overbought" territory (which, typically, we peg as anything over 70). In addition, Zacks reports that 28 out of 37 analysts consider the equity a "buy" or better, with not a "sell" rating in sight.

In the same vein, the stock's Schaeffer's put/call open interest ratio ( SOIR ) rests at 0.40, implying that calls more than double puts among options slated to expire within three months. What's more, this ratio ranks in the 35th annual percentile, indicating that short-term speculators have been more bullishly biased toward EMC only 35% of the time during the past 52 weeks.

With nearly everyone on the Street already devoted to EMC's bullpen, one question remains: can the stock recruit more buyers to propel its quest for new highs?

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This article appears in: Investing , Options

Referenced Stocks: EMC , RSI , SOIR

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