VMware (VMW), a virtualization infrastructure and cloud solutions provider, set the stage for a breakout in Wednesday’s session. And if the larger technical picture has any influence, bullish investors may want to consider an intermediate-term collar strategy in VWM stock to capture continued upside with defined risk.
Given the NASDAQ Composite and the S&P 500 finishing 1.2% on Wednesday, VMW stock’s 3.2% push higher is impressive. However, in consideration of its market-like Beta, the move is even more impactful.
What’s more, based on all the corrective pattern work that’s occurred in VMW over the last 14 months; it’s our belief Wednesday’s strength in VMware shares could be signaling a stronger, positive change of character and, who knows, maybe even relative strength leadership for VMW stock in 2015’s second half.
VMW Daily Stock Chart
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As the provided and detailed daily chart of VMware stock suggests, shares of VMW have put in the time and proper technical work worthy of an imminent and potentially large upside move.
The latest healthy development in VMW, after bottoming in an inverse head-and-shoulders pattern, is a tight multi-week flat base or W pattern of several weeks in length.
This bullish basing in VMware shares is considered more attractive in that it held a secondary or alternative minor trendline at two pivot lows and did a fairly good job of holding its neckline breakout.
Whatever technical description you might attach to the current base in VWM stock is mostly semantics. At the end of the day, its constructive price action for bulls.
In the near term, a breakout from the flat base should find VMW hitting $95-$97 before maybe encountering resistance.
Our initial price target is a conservative measured move estimate from the inverse head to its neckline. From there, I suspect $100 could stall bulls temporarily as century marks are typically good for a bit of profit-taking and additional investor reflection.
And if the market is willing to cooperate to some degree, VMW’s all-time-highs set back in 2013 of $125 is still about 33% above current levels. And given what the markets have managed to do this year, that seems approachable and maybe worthy of visualizing something more.
VMW Collar Strategy
Given the scope of VMW’s correction, our intermediate-minded bullish aspirations while also appreciating some potential resistance levels along the way; a collar strategy is well-suited for positioning in VMW stock.
In reviewing the board, one that I like for initial positioning, as these are highly adjustable spreads over time, is the VMW Jul $95 call/$85 put.
With shares of VMW finishing at $90.72, buying the Jul $85 put, selling the Jul $95 call and purchasing an equal ratio of VMW stock to complete the collar can be done for a debit of $90.42.
The pricing reflects buying shares of VMW and receiving a 30-cent credit for the combined option spread; which is priced for a realistic fill given VMW’s options liquidity picture. As for the initial risk-to-reward profile, this VMW collar establishes an effective stop loss at $85 and roughly 0.7% below the base pivot low.
The selected put also means the trader absolutely contains their exposure to about 6% of VMW, which is a nice form of insurance that a traditional stop-loss in shares can’t offer with any sort of guarantee.
And on the upside, if VMW does proceed higher, there is an initial profit cap tied to the sold $95 call. However, the current $4.58, or about 5% return, can be adjusted. By rolling up and out the call and put to higher strikes and in due time, later-dated contract months, the trader can continue to improve their risk-to-reward profile.
As of this writing, investment accounts under Christopher Tyler’s management do not currently maintain positions in the named securities or their derivatives, but may look to initiate for portfolios after publication. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT