Last night, Oracle Corporation (NYSE:ORCL) reported earnings and ORCL stock investors hated what they saw. Management over-delivered on its promises and increased its buybacks. But traders ignored all the successes and chose to focus only on a disappointing cloud business growth forecast.
Coming into the earnings event, ORCL stock had been up 30% year-to-date. So this big fall on earnings is fast becoming a habit. The company did the same thing in September and that proved to be a good knife to catch, but Oracle stock still requires caution.
After all, equity markets are at all-time highs with so many macro worries on the short-term horizon.
How to Trade ORCL Stock
Nevertheless, I want to deploy a bullish position today like I did on the last report for a mid-term trade. I consider this a speculative bet inside a conservative portfolio. I want to sell premium into what others fear. In this case I will sell downside risk into proven support. The ORCL report was not as bad as the price action suggests it to be.
Fundamentally, ORCL stock has a price-to-earnings ratio of 21, which is cheap in absolute and relative terms. So I wouldn’t mind owning it at a discount. Compare this to Salesforce.com, Inc. (NYSE:CRM), which has an astronomical P/E higher even than that of Amazon.com, Inc. (NASDAQ:AMZN). Another way to gauge value, consider the fact that ORCL has the same P/E as General Electric Company (NYSE:GE). GE is a company in limbo with questionable profit plans.
ORCL and CRM are mortal enemies with loud management teams. This extends into their stock investors and their emotions run high. This results in exaggerated moves on headlines. Moves like today elevate the options premiums, which usually are good opportunities for premium sellers.
In the long run, there will be room for the whole sector to prosper. We are relying now more than ever on technology and the cloud is central to that. This dependency ramp is increasing at a blistering rate so ORCL and its competitors will have the opportunity to do well.
Technically and on this drop, ORCL stock is trading just above a long-term pivot zone. Those tend to be sticky, so I expect it to be of some support. Both bulls and bears usually want to win, so they fight it out hard and create a stall.
I will use that as a barrier between the current ORCL stock price and my risk. I know I will need it since I’ve already seen a headline downgrading the stock.
Momentum stocks like ORCL are scary knives to catch. That is why I use options where I can do so and leave plenty of room for error.
The Trade: Sell the ORCL Mar $43 put for 50 cents. This is a bullish trade, which gives me an 85% theoretical chance of maximum profits. Otherwise, I must own the shares and accrue losses below $42.50.
For those who prefer to take more limited risk, they can sell spreads instead.
The Alternate Trade: Sell the ORCL Mar $44/$43 credit put spread, where there is about the same odds of success, but with smaller risk. However, if it wins, the spread could yield 18%. In either setup, all I need to win is that Oracle stock hold above my support into 2018.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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.