After a long and profit-filled run, VMware, Inc. (NYSE:VMW) shares are finally pausing to collect their breath. And the respite is well-deserved. Since August 11, VMW stock has soared over 18% which isn’t bad for one month’s work.
Fortunately, the profit-taking hitting the stock has been mild. That has allowed VMW to tread water instead of retreating aggressively. The action over the past week and a half has formed a high-quality base just beneath resistance.
Meanwhile, the 20-day moving average has been playing catch-up, which is a sign that the overbought conditions arising after VMW’s monster run are in the process of being worked off.
While the duration of the sideways digestion is anyone’s guess, its eventual resolution is likely to be higher, not lower. So says the laws of trend-following which suggest a trend in motion is more likely to persist than not.
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With the 20-day moving average still some $5 below the stock, a few more days of basing would improve the posture of the next breakout trade. On the volume front, buyers have dominated over the past month.
Numerous accumulation days accompanied VMware’s rise, adding legitimacy to the ascension and increasing the likelihood that subsequent price dips and breakouts are bought up.
The VMW Trade
The implied volatility for VMware options is low suggesting long premium plays is the way to go. Let’s consider two trades, one aggressive and one conservative.
For the gunslingers looking for unlimited profits if the stock rips higher over the next month, buy the Oct $105 call for $4.60 or better. The risk is capped at the initial investment and will be forfeited if the VMW sits below $105 at expiration.
Those looking for a lower-cost avenue for betting could buy the Oct $105/$110 call spread for $2.80. The risk is quite a bit lower at $2.80, and you will lose it if the stock sits below $105. The reward is limited to $2.20, and you will need the stock to rise above $110 by expiration to capture it.
In timing the entry, I suggest waiting for a break above resistance at $105.50 to confirm the next price advance has begun.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
