Enterprise software firm Oracle Corporation (NYSE:ORCL) will join the earnings-season stragglers this week by releasing its third-quarter report after the close of trading tomorrow night. As I noted in this morning’s Monday’s Vital Data, ORCL stock has recently become popular among call traders in the options pits.
But is that popularity smart money betting on a rally, or hedging activity by ORCL bears?
For the record, Wall Street is looking for a profit 69 cents from Oracle’s third-quarter report, up a penny per share from year-ago results. Revenue, meanwhile, is seen arriving up about 1.6% year-over-year at nearly $9.5 billion.
Even amid this low-expectations environment, the analyst community has its concerns. Specifically, EarningsWhisper.com reports that Oracle’s third-quarter whisper number arrives a penny shy of the consensus estimate at 68 cents per share. While Oracle has made great strides in the migration of its core services into the cloud, much of Wall Street’s trepidation appears to revolve around growing competition from smaller, more nimble, cloud-based competitors.
These concerns haven’t disrupted the brokerage community’s long-term bullish outlook on ORCL stock, however. According to data from Thomson/First Call, ORCL stock has attracted 21 “buy” ratings, compared to 15 “holds,” and just three outright “sell” ratings.
On the other hand, ORCL stock currently resides only about 10% below the consensus’ 12-month price target of $47. In other words, unless Oracle shows some solid signs of growth, the stock could be vulnerable to downgrades to “hold” on valuation concerns.
Short interest is also a concern from ORCL stock traders. As of the most recent reporting period, some 2.6 million shares of ORCL stock were sold short, representing 15.7% of the stock’s total float. There is more than enough short interest here to fuel a covering rally, but, once again, Oracle would have to provide strong earnings and guidance figures to shake these bears loose.
Turning the options pits, we find a fair amount of uncertainty. While Friday’s options volume points toward a preference for calls, activity on ORCL has actually leaned more toward the put side of the tape since the start of March. Specifically, ORCL’s front-month March put/call open interest ratio has risen steadily from a perch at 0.70 on March 3 to today’s reading of 0.96, which places puts and calls in near parity.
There are two takeaways from this options data. First, short-term traders appear to be growing more nervous as Oracle’s earnings approach — a development that stands in contrast with recent notes from the brokerage community. Second, short sellers don’t appear too nervous about a potential post-earnings rally for ORCL stock, as evidenced by the lack of heavy call open interest to hedge their short positions.
Click to Enlarge A closer look at March options reveals that implieds are pricing in a potential post-earnings move of about 5.4%. Such a move would place the upper bound at $44.80, just shy of overhead resistance at $45, while the lower bound comes in at $40.20, below ORCL’s 200-day moving average but above the round-number $40 level.
2 Trades for ORCL Stock
Call Spread: Those traders looking to buck the trend in the options pits and side with the brokerage community might want to consider the Apr $42/$44 bull call spread. At last check, this spread was offered at 93 cents, or $93 per pair of contracts. Breakeven lies at $42.93, while a maximum profit of $1.07 cents, or $107 per pair of contracts, is possible if ORCL stock closes at or above $44 when April options expire.
Put Sell: If an outright bullish play on ORCL doesn’t play into your risk assessment of the stock, then a put sell may be a way to advantage of the stock’s technical support. Along those lines, a Mar $39 put sell might be a way to capitalize on ORCL’s technical backdrop.
At last check, the Mar $39 put was bid at 23 cents, or $23 per contract. The upside to this put sell strategy is that you keep the premium as long as ORCL stock closes above $39 when March options expire. The downside is that should ORCL trade below $39 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $39 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
