VMware Stock Options Being Used For Stealth Stock Ownership (VMW, EMC)

VMware’s (NYSE:VMW) stock options trading has been almost as exciting and puzzling as watching the stock in this post-IPO frenzy since EMC Corp. (NYSE:EMC) launched its partial spin-off in last month’s key IPO. In fact, it may even be more exciting.  With such a low float and demand for the shares much higher than available in the shares the stock options are quite obviously being used as a stealth trade to own the stock.  Buying out of the money calls (and maybe even selling out of the money puts- not yet evident in volume) has to be how traders are participating in the VMware gold rush. 

On Monday September 10 there were just under 10,000 contracts traded in the closest September Calls alone ($65 to $80 strike prices). The October Calls were far less active but go out to January 2008: 1,137 of the JAN $100 CALLS traded.  Someone was betting on a $100.00 stock price by January 18, or at least they are betting for a huge rise even if it never goes in the money.

Yesterday’s options were active as well.  Various call strike prices in the month of September saw another 10,0000 contracts trade hands.  There are still big bets going in the $100 strike price calls for October: There were almost 1,200 of these $100 strike contracts traded for October.  The $100 strike price in JAN-08 Calls saw 441 contracts trade and the $100 strike in the APR-08 Calls saw 582 contracts trade hands.

Just last night, Jim Cramer on MAD MONEY listed this one as one of his draft choices for his ‘fantasy football draft methodology’ for picking winning stocks that won’t be dependent upon Bernanke and rate cuts in a recession.  Traders are making big bets here in the form of options.  On a fully leveraged basis, each 10,000 contracts equates to 1 million shares. 

The company just announced its first acquisition this week and it hasn’t been public a month yet.  It also knows it has this "VMware conundrum" that exists in the EMC-VMware share price to valuations because of the incredibly low float.  Virtualization is going to be huge and the company is going to command some major growth ahead in its revenues and position.  Regardless, the company has a lot of growth it needs to do to catch up to its now greater than $25 Billion market cap. 

Shares are up another 2.5% pre-market today at $78.75, and shares traded as high as $82.75 intraday yesterday.  Options are definitely being used as a stealth-ownership trade.

Jon C. Ogg
September 12, 2007

Jon Ogg produces the 24/7 Wall St. SPECIAL SITUATION INVESTING NEWSLETTER; he does not own securities in the companies he covers.