EMC Corp. Poised for Pullback?

Out of the gate Wednesday, an investor in EMC Corp. (EMC) sold off the upside of the stock to decrease the cost of downside protection in an intermediate-term risk reversal.

The investor bought the January 2010 17.5 risk reversal, selling the near-the-money January 2010 17.5 calls and buying the near-the-money January 2010 17.5 puts 20,000 times for 35 cents per spread with the stock trading at $17.20 a share. The January 17.5 calls, currently trading up three cents on the day, have traded more than 21,500 times and are home to current open interest of 33,460 contracts. The January 17.5 puts have dropped 18 cents so far on the day and are home to current open interest of 9,250 contracts.

The investor most likely sold the January 17.5 calls for 75 cents to buy the January 17.5 puts for $1.10, which equates to a net cost of 35 cents per spread.

EMC shares are currently trading up 15 cents on the day, and the heavy options activity we saw out of the gate does not seem to have a catalyst. This type of options activity is not necessarily all bearish. A risk reversal is a hedge against sharp downward movement but it limits the potential upside. But remember, this could be an investor who is already long the shares. EMC has seen a strong rally since its March lows of $10.66; the stock is up more than 60% since then. The investor who bought this risk reversal could just be hedging that position after the run in the stock. If that is the case, then this investor makes the most money if the stock rallies, because they are long the shares against the spread.