2 Bearish Trades on Oracle Stock (ORCL)

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Options activity has been brisk on Oracle Corporation (ORCL) during the past week, as traders look to position themselves ahead of tomorrow’s quarterly earnings report. Put options are the flavor of choice ahead of the event, barring an unusual call block trade here and there, with the December/January put/call open interest ratio in Oracle stock rising steadily. But, is this bearish options activity smart money, or should traders side with the bulls in the brokerage community?

Checking in on the numbers, ORCL is expected to post a second-quarter profit of 68 cents per share, with the consensus falling smack in the middle of the company’s guidance for earnings between 66 cents and 70 cents per share. Revenue is seen rising 2.6% to $9.52 billion on the quarter.

12-16-2014 ORCL
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Technically, Oracle stock has been in decline during the past week, with shares retreating from staunch overhead resistance in the $42 region. The pullback saw ORCL dip below key technical support at its 200-day moving average on strong volume – a development that could make technical investors skittish.

The stock’s only bright spot in the past week came from the brokerage community, where Morgan Stanley upgraded Oracle stock to “overweight” from “equal weight” citing “improving results in secularly important portions of the business.” Morgan Stanley also lifted its price target to $50 from $45.

Overall, analysts are leaning bullish on ORCL stock. According to Thomson/First Call, the shares have attracted 20 “buys,” 16 “holds” and just three “sell” ratings. The 12-month consensus price target rests at $45.

As I noted above, options traders appear to be betting against ORCL stock. For instance, the December/January put/call open interest ratio arrives with a bearish skew of 1.06. Zeroing in on the soon-to-expire December series (i.e. the one most influenced by this week’s earnings), we find a considerably more bearish put/call ratio of 1.24.

Furthermore, according to data from OptionMonster, some of the call open interest on ORCL stock may not be as bullish as it appears. Specifically, the data reveals that a block of 13,660 January 44 calls were sold for the bid price of 29 cents, or $29 per contract, on Friday. With volume at the strike coming in at more than twice the prior open interest, it’s a safe bet that this was a new position.

There are two potential strategies involved with this sold call position. First, the trader could have sold these options naked (i.e. without owning the underlying stock), resulting in a bearish position that allows the trader to keep the sold premium as long as ORCL closes below $44 when January options expire. Second, and more likely, is that the traders owns ORCL stock and is opening a covered call position to pad his portfolio in the event of an earnings selloff.

Overall, December option implieds are pricing in a potential post-earnings move of 5.31% for Oracle stock. This places the upper bound at $43.18, while the lower bound lies at $38.82. A rally has the potential to push the shares beyond resistance at 42, while a decline would breach both ORCL’s 50-day and 200-day moving averages.

2 Trades for Oracle Stock

Put Spreads: Those traders looking to jump on the bearish bandwagon in the options pits might want to consider a Jan 2015 $39/$41 bear put spread. At last check, this spread was offered at 60 cents, or $60 per pair of contracts. Breakeven lies at $40.40, while a maximum profit of $1.40, or $140 per pair of contracts, is possible if ORCL closes at or below $39 when January options expire. Traders should also note that a double on this trade can be had (at $39.80) even if ORCL fails to drop below the $39 mark, so be sure to set your limit orders accordingly.

Selling Calls: If betting directly against Oracle stock isn’t your style, you might consider entering a Dec $44.50 call sell position. Such a trade is especially useful if you already own ORCL, as it allows you to make up for some downside losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $44.50. At last check, this option was bid at 14 cents, or $14 per contract. A sold call allows you keep the premium as long as Oracle stock closes below $44.50 when December options expire at the end of this week. On the downside, if ORCL rallies above $44.50 prior to expiration, you could be assigned 100 shares for each call sold at a cost of $44.50 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/2-trades-for-oracle-stock-bears-ahead-of-earnings-orcl/.

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