Traders Betting on EMC Spinoff of VMware

Is EMC ready to spin off VMware (VMW), perhaps to Cisco (CSCO)? Wall Street traders seem to think so, according to the Journal.

Is EMC ready to spin off VMware? These rumors have been around before, and got a lot of attention following the surprise exit of VMware CEO Diane Greene. The New York Times called Greene's dismissal a "dramatic gesture" by EMC to silence talks off a spinoff.

If so, it didn't work. Wall Street watchers are again focused on VMware spinoff rumors after an unusual surge in purchases of call options in EMC stock, according to the Wall Street Journal. Call options are a bet that shares will rise in value. On Wednesday traders bought more than 350,000 EMC calls, outnumbering bearish "puts" more than three to one. "Somebody is taking a huge bet that these shares are about to rally," Joe Kinahan, chief derivatives strategist with Thinkorswim, told the Journal.

Large flows in options can sometimes be leading indicators, but are often just speculative and amount to nothing. A similar surge in EMC calls occurred back in April during the last bout of chatter about a VMware spinoff.

The Journal said the heavy options trading may be driven by comments by EMC Chief Executive Joseph Tucci during a July 23 earnings conference call, when he said that the company had no plans to shed its holdings but added that "we will do the right thing for the shareholder when and if the time is right."

To some, that may seem like the CEO is suggestively leaving the door open. The missing context is that Tucci would be unlikely to make any statements that would completely puncture investor hopes of a VMware spinoff, as that might prompt some shareholders to sell.

What makes this rumor interesting enough for the Journal to nibble on it? The prospect that VMware might be bought by Cisco Systems (CSCO), whose ambitions in the data center would get a significant boost from owning VMware.