Late last week Enis previewed ORCL’s fiscal Q1 earnings report (below) that is due out after the close tonight. I wanted to quickly highlight the technical set up. Despite being unchanged on the year, the stock is neither washed out, and not really overbought since its 10% bounce from the June lows. The technical set up speaks to the stock being in No Man’s Land. The five year chart below shows the near term support at $30 (red horizontal line), the long term support at $25 (white) and the overhead resistance at $36 (white). I guess the most troubling aspect of the chart if I were long would be the trend-line from the 2013 highs (red) showing a series of lower highs and lower lows.
The implied move in the options market has crept up a tad from last week to about 4.8%. The at the money straddle (if you were to buy the weekly Sept 33.5 call and put that expire, stock reference $33.65) would cost about $1.62, so you would need about a 4.8% move in either direction by Friday’s close to just break-even.
Given the stock’s declines of 9.26% and 9.69% over the last 2 quarters, and ADBE’s 7% gains today following its own results, options traders are clearly bracing for movement tomorrow. Frankly I could easily see the stock up or down $1.60 tomorrow, but the question is whether or not I am willing to risk a few % of the underlying that the stock can make an out-sized move, as that is the only way you can make money in a very short period of time.
For Those willing to bet on movement and not on direction, a fairly simple volatility trade would be the way to play:
HYPOTHETICAL: ORCL ($33.65) Buy Sept 33.50 Straddle for 1.62
-Buy 1 Sept 33.50 Call for .74
-Buy 1 Sept 33.50 Put .88
Break-Even on Sept Expiration (Friday):
Profits: above 35.12 or below 31.88 the trade makes money
Losses: btwn 31.88 and 35.12 lose up to 1.62 with max loss of 1.62 at 31.88
Trade Rationale: Cant make up mind on direction but think the stock could test prior support ($30) on their 3rd consecutive miss and guide down, or the company has hit an inflection point and finally puts up a beat and raise causing underweight investors to chase back up to previous highs ($36) then this is one way to play.
While the premium outlay of $1.62 seems hefty, there is a very low probability that you would really be risking the whole $ 1.62 as the likelihood of the stock being exactly at $33.50 on expiration is very low. But think about it this way – if you were long the straddle and did not trade out of it tomorrow, the options will see a massive vol suck and most extrinsic value will come out of them, and Friday afternoon if the stock was say $33 and you owned the Sept 33.50 straddle, it would be worth pennies over .50, and vice versa if the stock was $34. The closer you get to expiration, and the further from one of the strikes the quicker the out of the money strike you are long will go to zero, while the in the money strike will have minimal optionality and at the point it will trade like stock.
We rarely choose this type of trade structure ahead of earnings because of the instant vol crush after an event. While we’re doing nothing ourselves, the structure piques our interest because of what we view as pivotal guidance from ORCL after 2 bad quarters. But make no mistake, if earnings are a non-event, this structure would be a loser.
$ORCL Fiscal Q1 Earnings Preview
Event: ORCL reports their fiscal Q1 earnings on September 19th after the close. The options market is implying about a 4.5% one day move, which is below both the 4 qtr avg of about 6% and the 8 qtr avg of about 5.75%.
Sentiment: Wall Street analysts are generally positive on the stock, with 32 Buys, 12 Holds and 2 Sells, with an average 12 month price target of around $36. Short Interest is at 1.2%.
Options Open Interest: Open interest is skewed 1.1 to 1 towards calls vs. puts. The largest open interest is concentrated in Jan14, in the Jan 37 calls (45k) and the Jan14 30 puts (27k). Interestingly, ORCL’s yearly range is 30 to 36.5. Among near dated options, the Sept 34 calls have around 25k of open interest.
Price Action / Technicals: ORCL has been a serious market laggard since 2011. The weekly chart shows how the stock was unable to get above its 2011 high around $36.50 earlier this year:
Weekly Chart of ORCL, Courtesy of Bloomberg
In the near-term, the stock continues to make lower highs since its high of the year in mid-March, so the short-term downtrend shown in red is important to watch. Long-term support is around the $30 level, shown in green. The two major blue candles this year are the last 2 earnings reports, so investors will likely lose patience with ORCL if it has another nasty miss.
Fundamentals: ORCL management has done a very poor job in 2013 of guiding investor expectations. After their March earnings miss, they blamed it on some of the expected sales being pushed into the next quarter. But on the June earnings miss, it became clear that ORCL was getting hurt by the international slowdown as well as by emerging competition from emerging cloud companies.
This is ORCL’s seasonally slow quarter, so guidance going forward will be especially important. The one positive for ORCL is that it is starting to look cheap vs. other large cap stocks in the market since it has been stagnant over the last 2 years. Here is its trailing 12 month P/E over the last 10 years:
ORCL Trailing 12 month P/E, Courtesy of Bloomberg
But if ORCL’s 8-10% expected earnings growth appears too optimistic, then a 14x multiple might start to look too rich as well.
Volatility: ORCL realized volatility has been very subdued ever since the last earnings report. While implied volatility has risen into earnings next week, the 30 day implied volatility is likely to fall back to the 20 area after the event:
ORCL’s last 2 earnings moves were almost identical in scope (down 9-10%), so options traders are less willing to sell volatility ahead of earnings this time around.