Battle Lines Are Being Drawn in EMC

The option market seems to have excessive pessimism in EMC (EMC - commentary - Cramer's Take), the data storage company. Last week I noted that there was a surge in call-buying as the stock approached its 52-week low of $14 a share, but I was not ready to make a commitment as to what it meant as the market was still in turmoil and there was also a fair amount of put volume.

Today there was huge volume in the April puts -- 31,000 contracts traded against prior open interest of 42,000 in the strike -- so the open interest is sufficient to cover the trade.

While this means it could be a liquidation, the bulk of the trading occurred in three large blocks of 4,500 and two 2,500 contracts that were executed at what was then the offer price of $1.05 a contract.

While we won't know until tomorrow when we see the open interest numbers if this was a liquidation, my gut tells me that at those big blocks, trades were fresh purchases.

According to the conventional wisdom that option activity is often a contrary indicatory, new purchases would be a bullish sign. It also doesn't hurt that the chart has held that important support at the $14 level and its still owns some 80% of VMware (VMW - commentary - Cramer's Take), which despite being well off it highs still filled EMC's coffers when it had its IPO last August.

I'd look at buying some EMC July $16 calls for $1.00 a contract.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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