Oracle Corporation (NYSE:ORCL) reported earnings last night and investors hated what they heard. The stock is down 9% on the headline, even though the results were not terrible. Management met expectations but the nail in the bull coffin came during the conference call when guidance came out less than enthusiastic.
Fundamentally, ORCL beat the top line and met the bottom line. But on a day when the Nasdaq PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) fell over 2.1%, anything less than a solid beat and raise from management is just asking for stock price trouble.
As a practical matter, ORCL is improving its niche in the new tech world paradigm. It is growing the cloud and software-as-a-service businesses at 30%. But anything short of perfection will invite short-term selling … and therein lies my opportunity.
No, I am not brave enough to buy the shares on their first red day and leave no room for error. This is a nervous stock market and the CBOE Volatility Index is too high for that kind of risk. But I am willing to own Oracle stock at an even deeper discount than this dip.
The ORCL valuation at a price-to-earnings of 22 is cheap — especially when it also ranks high in profitability and growth. This is not a slacker company. This is a proven survivor of the Dot Com era that is steering the ship the right way for the next decade. After today’s dip there is little froth left in Oracle stock before the bears start cutting into the bone.
Click to Enlarge The experts agree, as most Wall Street analysts rate Oracle stock as a buy. Their collective price targets are mostly much higher than current price, so they obviously think that there will be better days to come. And although this quarter report did not wow analysts, I don’t think it disgusted them enough to downgrade their ratings on it either.
It is important to note that my trade setup doesn’t require a rally to profit. As long as support holds, I can create income out of thin air.
Technically, ORCL stock came into its earnings event showing solid upside potential. It took it over a decade to recover from and surpass the level from the Dot Com bubble, so a dip here is nothing alarming yet. My opinion would change if the macroeconomic thesis changes. But for now, we have synchronized global growth and a boom in tech.
Oracle Stock Trade Idea
The Trade: Sell the ORCL Sep $40 naked put and collect $1 to open. Here I have a 85% theoretical chance that I would retain maximum gains. But if the price falls below my strike, then I own the shares and would suffer losses below $39.
Selling naked puts is daunting, especially in this political uncertainty. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the ORCL Sep $40/$38 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade require a rally to profit. In fact the stock can fall an additional 23% and I could still retain maximum gains.
Subscribe to my YouTube channel for free content here. Get newsletter 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.