Forget the silver lining. Following earnings from Oracle (NYSE:ORCL), the immediate forecast is for storm clouds and investors battening down the hatches. But for traders looking to cash in and not cash out on a weakened ORCL stock, a modified put butterfly spread offers a nice blend of profit and other opportunities. Let me explain.
For Oracle investors holding out hope that a couple prior earnings disappointments and bearish sales guidance weren’t the start of a more threatening trend; that commitment is on shakier ground.
ORCL stock was clobbered during Wednesday’s session by 7.46% after the tech giant delivered an earnings and sales beat, but trumped by weak guidance and a failure by management to provide specific revenue guidance for Oracle’s all-important cloud infrastructure and platform as a service businesses.
Bottom, top and even the squiggly lines on the price chart — with ORCL stock’s best chance for growth directed at the cloud, a market controlled by tech stocks Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL), the forecast is looking more threatening for today’s investors in Oracle.
ORCL Stock Weekly Chart
On the price chart, the one silver lining for ORCL stock investors is the longer-term big picture. The provided weekly view shows an uptrend line dating back to the financial crisis which remains intact. Shares are also moving towards a challenge of Oracle’s prior all-time-highs set during the Dot.com bubble, which should find some support from technically-oriented buyers. Combined, the area from $39.50-$42 looks key for the bull case.
On the other hand, not every pullback into support is a buying opportunity. A broadening or inverse topping pattern followed by a bearish flag formation confirmed by Wednesday’s fallout are signs ORCL could be facing a larger and bearish correction. And with the weekly stochastics setup looking weak as well, the bears have technical evidence of their own which demands investors respect.
So, which is it? Up, down or both? While there are no guarantees on the price chart, if I was to provide a forecast it would be for more near-term pressure in ORCL stock with the real opportunity for bullish investors near $40 or below.
Oracle Stock Bear-to-Bull Modified Spread
One way to capitalize on this flip-flopping from bear-to-bull is the 27 July $42/$41/$39 put butterfly. With shares at $43.44 the combination is priced for 5 cents. For the infinitesimal purchase price, this investor has the opportunity to capture 95 cents of profit if ORCL stock tumbles to $41 and sandwiched in-between the Dot.com high and the long-standing uptrend from 2009 at expiration.
Those profits are slowly given back if Oracle shares continue to fall until $40.05, at which time the investor breaks even on the position.
While the profits are forfeited, having the opportunity to go long ORCL stock near key technical support without being at a deficit when initiating the position sounds pretty good. And if conditions in Oracle shares deteriorate further? With risk ultimately contained to $1.05, the limited exposure could also come in pretty handy if other and deeper layers of support eventually come into play.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.