Name That Trade – $ORCL Protection and Yield

by CC August 13, 2013 10:22 am • Commentary

We got a question from a reader yesterday who owns ORCL shares, but is worried now that the stock has filled in most of the gap from its Q4 earnings disappointment in late June, that the stock could be stuck in the mud as it churns at a fairly important near term technical resistance level prior to the company reporting their fiscal Q1 in mid to late Sept. As Enis detailed in his CotD post last Friday (below) the stock could be a reaching a little bit of an exhaustive phase, despite today popping above its 200 day moving avg for the first time since early May.

Not to over do it on the charts but if I were long and looking to hold on to the stock I would be keeping a very close eye on the downtrend from the March 52 week highs and the break-down level from June into the Q4 report as fairly staunch near term resistance and possibly a decent level to look to overwrite.  On the downside, barring any stock specific news, 32 should be a level where the stock sees a bit of a support.

ORCL 1 yr chart from Bloomberg
ORCL 1 yr chart from Bloomberg

The one tricky thing here is that its is unclear if earnings will fall in the last few days of Septemeber options or in the first few days following their expiration. We’ll know soon when the company confirms a date.  Based on the fact that Sept options expiry captured the earnings event in 2011 and 2012, we are working with the assumption that Sept expiry will capture earnings.  With that in mind, here is a protections structure designed to help protect a long stock position ahead of earnings (especially since ORCL has been down 10% after the last two releases):

Hypothetical Trade ORCL ($33.20) Sell the Sept 34 Call, Buy the Sept 33/32 Put Spread for 0.27 credit

  • Sell 1 of the Sept 34 Calls at $0.63
  • Buy 1 of the Sept 33 Puts for $0.90
  • Sell 1 of the Sept 32 Puts at $0.54

Breakevens on Sept 21st: Between 33 and 34, the trade is a 0.20 winner (the credit received).  It offers protection between 33 and 32, and the long stock gets called away above $34.20.

Rationale:  The crucial support level on ORCL is around $30.  Since the stock has filled the last earnings gap, protection should probably be structured close to at-the-money if you are concerned about near-term selling.  However, rather than simply buying a put or a put spread, selling the upside call cheapens the protection and could be worth selling given the overhead supply from May and June between 33.50 and 35. This is a structure that sets up for a pullback or stalling of the stock between now and earnings. If the stock does pause or pullback, the structure could be taken off into earnings having added yield to a winning long from lower levels.





Original Post Aug 9th, 2013:   Chart of the Day – $ORCL : Don’t Worry About the Vase

ORCL is flat in the past 2 years, despite the 50%+ rally in the S&P 500 index in that time.  The company has been struggling to keep up with smaller competitors at the same time that enterprise spending has slowed overall.  The company has continued to grow earnings in the past 2 years (by about 15% in fact), but its P/E multiple has contracted as the market’s expectations for future earnings growth has deflated:

Trailing 12 month P/E of ORCL, Courtesy of Bloomberg
Trailing 12 month P/E of ORCL, Courtesy of Bloomberg

Going forward though, analysts only project 5-10% earnings growth, and so the 15 P/E multiple does not look cheap anymore.

After a bad earnings miss last quarter, ORCL has rallied with the broader market, and actually filled in its earnings gap to the penny (at $33.21) earlier this week:

Daily chart of ORCL, 200 day ma in black, Courtesy of Bloomberg
Daily chart of ORCL, 200 day ma in black, Courtesy of Bloomberg

The gap coincides with the 200 day moving average, which has flattened out.  Upside progress from here could be hard to come by given all of those underwater buyers throughout most of 2013.  The important support level going forward is the $30 level, which has now held twice in the past year.  The next earnings report for ORCL is in late September, though CSCO’s report next week could be a catalyst for ORCL as well.