EMC Corporation (
) 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.
For starters, EMC's Relative Strength Index (
) currently rests at 65, on the verge of "overbought" territory
(which, typically, we peg as anything over 70). In addition,
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
) 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
bullishly biased toward EMC only 35% of the time during the past 52
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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