If you review my TradeKing account, you’ll see I made the first trade in my WTF Fund. I bought a long put option on the company VMware Inc. (VMW). The strike price is at $90 and is set to expire February 19th 2011. At the date of publishing this post, the stock is currently around $96/share. What this means in plain terms is I’m hoping the stock price will decrease on or before that date to below $90/share.
A long put is similar to shorting a stock, but unlike shorting, your losses are limited to the amount paid. When shorting a stock, without a stop loss order, you have potentially unlimited losses. Granted, neither shorting a stock or a long put option is for the beginner trader. As with any trade, make sure you understand the risks and potential gains (or loss). TradeKing has some great online resources about options. The Options Playbook web site discusses what is a long put.
Regarding VMware, I’m very familiar with this company, the industry, and stock. While I use their products on a daily basis, it is ripe with expensive products and services. Like most technologies, it’s being democratized by other companies. Companies like Citrix (CTXS) offer similar services for a much cheaper price or in other case of CentOS for free!. Virtualization is becoming the core component of the operating system and eventually will be included for free. This forces VMware to try to sell other premium services, instead of the virtualization. Right now I believe the stock is caught up in the cloud computing hype and is set for a short term fall.
VMware’s stock price is VERY expensive compared to its earnings. According to Morningstar, their forward P/E is 53! In comparison Citrix, which has a much wider variety of services, sells only (heh only) 29 times forward earnings. In my opinion, the stock market overall is not cheap, and VMware’s stock is quite expensive. With my long put option I expect the price to be at least $90/share or lower by February 19th. They are currently trading close to their 52 week high. Obviously the issue with shorting any stock is the market can stay irrational longer than you can stay solvent. Worst case scenario, I’m out $225. Not a bad bet based upon the stock’s fundamentals and a risk I’m willing to take in my WTF Fund.
Disclosure: Long put option on VMW.