EMC tumbles on VMWare troubles

Posted Jan 29th 2008 1:22PM by Brent Archer
Filed under: Major Movement, Earnings Reports, Bad News, EMC Corp (EMC), Options, Technical Analysis

EMC Corporation (NYSE: EMC) this morning reported a fourth-quarter profit of 24 cents a share on revenue of $3.83 billion, beating analysts' estimates of 22 cents a share on revenue of $3.66 billion. However, EMC shares are plummeting this morning after VMware Inc. (NYSE: VMW), which is 86%-owned by EMC, reported fourth-quarter revenue of $412.5 million. Because analysts had expected VMW to report revenue of $417.4 million, investors may be thinking that VMW's breakneck growth will slow down for the first time since the company's August IPO. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on EMC.

After hitting a one-year low of $12.74 in March, the stock hit a one-year high of $25.47 in October. This morning, EMC opened at $15.42. So far today the stock has hit a low of $15.30 and a high of $15.75. As of 11:35, EMC is trading at $15.63, down $1.28 (-7.6%). The chart for EMC looks bearish and steady, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.

For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $18 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in 2 months as long as EMC is below $18 at March expiration. EMC would have to rise by more than 14% before we would start to lose money.

EMC hasn't been above $17.50 since late December and has shown resistance around $16.30 recently. This trade could be risky if the economy turns around quickly, but even if that happens, this position could be protected by resistance EMC has formed between $16 and $17 over the past month.

Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in EMC or VMW.

Tags: earnings, EMC, inthenews, options, VMW, VMWare