Options Update: Dell Call Volume Spikes Ahead of Earnings
During the past couple of days, the technology sector has been smacked with an earnings warning from Intel
PowerRating) a lowered sales forecast from Nokia
PowerRating), and an article in The Wall Street Journal titled “PC Makers Scramble as Demand Shrivels.”
As you would expect from this heavily bearish deluge of news, the tech-laden Nasdaq Composite (COMP) has plunged nearly 4%, while the Select Sector Technology SPDR has dropped about 4.25%. However, PC maker Dell
PowerRating) has not only bucked the downtrend, the stock has surged ahead more than 9%.
There are no headlines in the financial media that should have prompted such a rally in the shares, nor have I seen any speculation crossing the news wires this afternoon. There is the matter of Dell’s looming third-quarter earnings report, which is scheduled for November 20, after the market closes. Analysts are expecting a profit of 32 cents per share from Dell, down from last year’s 34 cents. However, this event seems too far on the horizon to have prompted today’s sharp rally in the shares.
Whatever the reason for DELL’s meteoric rise amid the session’s heavy selling pressure, options traders have piled into call positions on the security. More than 31,000 DELL calls have changed hands so far today, more than quintupling the stock’s average daily call volume and placing the shares on our Intraday Volume Explosion List. Nearly half of this call volume has changed hands at DELL’s soon-to-expire November 11 strike, which has caught my eye this afternoon.
The Anatomy of a Dell Call Position
Diving into the options data, I noticed that practically all of the November 11 contracts are trading at the ask price. The combination of this “ask” activity and the fact that volume has easily exceeded open interest at this front-month strike indicates that we could be looking at buy-to-open call volume on DELL. As such, I will be running with a call-buying theme this afternoon.
Taking a closer look at the volume, I noticed that several blocks of DELL November 1 calls traded on the same exchange at about 11:29 a.m. Eastern time. Specifically, 3 blocks totaling 1,117 contracts changed hands at the ask price of $0.83. The total outlay for this position would be $92,711 — ($0.83 * 100)*1,117 = $92,711. For this trade to reach breakeven, DELL would need to rally about 215% to $11.83 from yesterday’s close at $10.27 per share before the options expire on November 21. The maximum loss on this position is limited to the initial investment of $92,711.
By entering this trade, the investor is indicating that he expects DELL to surge during the next week, with the stock potentially reacting positively to the company’s earnings report. The shares are off to an excellent start, gaining about 9% at last check, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Technically speaking, there are several factors that could work against a November 11 call position. First, the shares are staring up at potential short-term resistance at the 12 level. This region previously provided a floor for DELL in late October and early November, and could now provide stiff overhead resistance. Second, the stock’s 10-day and 20-day trendlines have converged on the 12 level, with the former making a dive for the 11.50 area. DELL has closed only 1 session above this duo since August 28, and could find it difficult to muster the buying pressure needed to topple these trendlines. Remember, for the aforementioned November 11 call to reach profitability, DELL needs to rally above the 12 level.
The Sentiment Drivers
From a contrarian perspective, there is very little in DELL’s sentiment backdrop that would indicate a short-term rally from the shares. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.70 ranks below 70% of all those taken during the past year, as calls remain the investment vehicle of choice among speculative investors. Meanwhile, 12 of the 24 analysts following the equity rate it a “buy” or better. There is a chance that DELL could benefit from an upgrade or 2 from the 12 holdouts, but the company would have to impress these brokerage firms when it releases its quarterly report on Thursday next week. Looking at today’s call option volume and the security’s SOIR, it would seem that options players believe a positive report is a foregone conclusion.
I have to say that if you were among the lucky DELL options traders that jumped on the November 11 call before the shares surged in the 10-o’clock hour, you are probably very close to making a nice profit right about now. For everyone else, I suggest you think twice before following the herd. The stock’s technical and sentiment backdrops are far from supportive of this trade, and anything short of a stellar earnings report next week could be seen as a disappointment. In fact, with the above indicators in mind, I would definitely consider an in-the-money November put the closer DELL edges to technical resistance in the 12-13.50 region. While the company may report in line for the third quarter, I find it hard to believe that the Dell has anything nice to say about the fourth quarter or the holiday shopping season – and guidance has been the make-or-break theme of this round of quarterly earnings reports.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.