Monday, January 28, 2008

EMC dragged down by plunging VMWare

As TheNetFool pointed out in a comment to my previous post, EMC was down 13% to an after hours low of 14.70 before recovering to around 15.

My position in +EMCNR (Feb 17 put) was at 0.85 before the close. My Black-Scholes model says it's going to open at 2.14. This is unreliable since any number of things could happen at the open. EMC can gap lower, it can go up early and then come back down, or it can go higher. I don't know. Implied volatility will also change (either higher to reflect the increased historical volatility or lower since this unknown event is out of the way). Even though it is unreliable, the model gives us a good estimate to work with.

The same models say the Feb 16 put will open at 1.33 and the Feb 15 put will open at 0.69. I am seriously considering selling the Feb 15 put for 0.75 instead of trying to sell the Feb 16 put for 1.75. Since EMC is at 15 right now, I maximize the time value of the option by selling the at the money. I am still going to stick with my 14.25 target price.

1 comment:

Jimmy said...

Thanks for the headline!
Lets add in the fundamental value in EMC:

I anticipated such a gap-down in the future, but I have had EMC on my watch list and find the current price a lot more favorable on investors.

Why do we want to own EMC?

It's simple, EMC's stake in VMWare is a huge part of their business model. Their virtualization services allow EMC's servers to run at higher capacities. While many firms hold stock in VMWare (e.g. Microsoft), EMC is the first of which that can sell their shares off. They become eligible to sell in February and are widely expected to take action. I see them running the table after the extra free cash flow from the sale is made. This could be even in excess of 40% gains since they are so beaten down at this point.

I know that VMWare "tanked" today, but I call irrelevance! All that has happened in my view is that some of the potential upside from selling VMWare has instead been factored into the stock price. Since they are cheaper, it will just shoot up a bit less then expected after the sale (if it happens)

VMWare, and their excellent international exposure, is reason enough to try and catch EMC on the cheap. Keep your eye on EMC!