Normally, I don’t like to chase prices higher, so I’ve been holding out from taking a new position in Oracle Corporation (NYSE:ORCL) as it’s been on fire … until last night. Management reported earnings and the results were decent, yet traders are selling it down 4% and therein lies my opportunity to pounce.
We now live in a world that is becoming more dependent on technology than ever. This change is happening at an exponential ramp, so there should be room for all the companies that are currently supplying the infrastructure to the tech of the future and ORCL is one of them.
This technology ubiquity can only increase from here. So regardless of the earnings reaction, ORCL just told us they are successfully carving their place in the new normal. Earnings reactions tend to be binary and short term in nature, especially without new negative points of argument. I have to recognize that they are up against fierce competition from salesforce.com, inc. (NYSE:CRM), but that should only make them work harder.
If we’re talking value, Oracle is not expensive. Its price-earnings ratio is under 24. Compare that to a company like General Electric Company (NYSE:GE), which has a P/E of 28, yet is floundering to find its wind.
From a leadership perspective, ORCL is a long-term survivor of the dot-com bubble. Management is proven effective and they are currently making the turn to adapt to the new normal of tech around the cloud. Microsoft Corporation (NASDAQ:MSFT) is another example of a successful adaptation, whereas International Business Machines Corp. (NYSE:IBM) is a failure so far.
Technically, I don’t like to chase prices higher and I rarely chase them when they are at highs. This dip gives me some breathing room for entry. Coming into the earnings report, Oracle was up 35% in the past 12 months, which technically makes it a momentum stock. These usually too far too fast and they are tricky to trade. On the way up they seem like they’re about to correct. Conversely, on the way down they seem like they’re falling into an abyss thereby keeping most traders out.
These are usually too far too fast and they are tricky to trade. On the way up they seem like they’re about to correct. Conversely, on the way down they seem like they’re falling into an abyss thereby keeping most traders out.
In this case, I don’t think there will be an abyss. So I am willing to risk owning the ORCL shares but much lower than here. To do that I will use options where I can build myself a nice buffer zone just in case there are more hiccups through year-end.
Click to Enlarge I could be early sure but that’s the point. I sell against what others fear as long as I see value in which to shoot.
The Trade: Sell ORCL Jan $43 put and collect 60 cents to open. Here I have an 85% theoretical chance of maximum profits. But if price falls below my strike then I must own the shares and could accrue losses below $42.40.
For those who prefer to take more limited risk, they can sell spreads instead. Then they control the maximum loss by buying an equal number of puts as they sell.
The Alternate Trade: Sell ORCL Jan $44/$43 credit put spread where I have about the same odds of winning and it could yield 15%. In either setup, I don’t even need a rally to profit. I could still retain maximum gains as long as Oracle stock doesn’t fall below $43 per share this year.
This is nothing new as I’ve done this before. Back in April I shared an easy winning trade on a 5% dip in ORCL. But past performance is not a guarantee for repeat results. So, I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
