Tech stock VMware, Inc. (VMW - 93.62) has put in a stellar
performance during the past 52 weeks, with the stock gaining nearly
65% over this time frame. However, the equity's year-to-date
advance stands at a relatively modest 4.6%, as resistance in the
$95-$100 region has stalled several of VMW's rally attempts in
With VMW treading water just beneath this technical ceiling,
bullish call positions have fallen out of favor. During the past 10
days, speculators on the International Securities Exchange (ISE),
Chicago Board Options Exchange (
), and NASDAQ OMX PHLX (PHLX) have bought to open 1.81 calls for
every put on the stock. This ratio ranks in the tepid 39th annual
percentile, suggesting that traders have shown a greater appetite
for calls relative to puts about 61% of the time during the past
However, VMW's fan club hasn't fled the options pits entirely.
Instead, it seems that traders are taking a less aggressively
optimistic route by selling put options on the virtualization
concern, rather than buying calls.
Specifically, traders on the ISE, CBOE, and PHLX have sold to
open 5,758 puts on VMW during the past 10 sessions, compared to
just 2,760 puts that were bought to open. In other words, traders
sold to open 2.09 times more puts than they purchased during the
past couple of weeks.
By selling to open puts on VMW, speculators are most likely
banking on the stock to remain at or above the sold strike through
expiration. If this forecast comes to fruition, option writers may
retain the initial net credit as their maximum potential profit on
This certainly seems to be the case for traders who sold puts at
VMW's May 75 strike, which is nearly 20 points out of the money.
This strike carries 4,492 contracts in residence, the majority of
which were sold to open. Barring a major price plunge, it seems
likely these puts will expire worthless at the end of next week's
However, it's worth noting that there could be an alternate
motive for writing puts on VMW. Given the equity's impressive rise
during the past year, it's quite likely that there are a few
sidelined investors looking to participate in the rally. For those
traders looking to buy VMW on a dip, selling puts is a convenient
way to "get paid to wait" to purchase the shares at the desired
It works like this: If you'd like to buy $100 shares of VMW, but
would like to wait for a pullback to $90, you could simply sell to
open one May 90 put contract. You would receive an initial net
credit upfront for the transaction. Then, there are two potential
outcomes for the trade. If VMW fails to drop below the strike prior
to expiration, you can retain that entire initial credit as a
On the other hand, if the shares pull back below $90, you'll
likely be assigned. This means you'll be on the hook to buy 100
shares of VMW at your preferred entry price. In this case, you can
consider that option premium to be a "coupon," effectively
offsetting a portion of your cost of entry on the long stock
In fact, we could be seeing this tactic at work in the
front-month series. VMW's May 90 strike carries 3,790 contracts in
residence, the majority of which appear to have been sold to
Taking a closer look at the stock's price action, VMW is
sandwiched between support at its rising 20-day moving average, and
resistance in the aforementioned $95-$100 neighborhood. The shares
staged a bullish gap north of $90 in late April, so this area could
act as an additional layer of support during the short term --
suggesting those out-of-the-money May 90 puts just may expire
worthless, after all.
That being said, potential premium sellers should beware of
relatively cheap option prices. VMW's
Schaeffer's Volatility Index (SVI)
is docked at 29%, just a stone's throw from its annual low of 28%.
In other words, option writers aren't getting much bang for their
buck at the moment.
The spring 2011 issue of
magazine is now available here.