Name That Trade – $ORCL: Implied Move For Earnings Looks Cheap Plus Other Catalysts

by Dan September 17, 2014 3:21 pm • Commentary

To look at Oracle’s year-to-date performance, one might think the stock has been a huge laggard among large cap tech, up only 7.25% on the year, and down 5% from the 52 week highs made in June:

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

While stocks like AAPL, INTC & MSFT have made new all time or 14 year highs, posting gains of 25% plus so far in 2014, ORCL remains range-bound.  Some possible reasons could be the company’s weak performance in their database division, continued troubles with their hardware division (old Sun Microsystems), and costs associated with their increased competition for cloud offerings with the likes of Salesforce.com and Workday.  Additionally, while AAPL, INTC and MSFT have been perceived as slightly defensive, as sort of bond proxies, with very clean balance sheets and below market multiples in terms of valuation, ORCL has a paltry 1.17% dividend yield

Tomorrow after the close, ORCL will report its fiscal Q1 results.  The options market is implying about a 3.5% one day move (with the stock about $41, the Sept weekly straddle is offered at 1.45, so if you bought that you would need a move above $42.45 or below $39.55 by Friday’s close to break-even).  The implied move seems fair when you consider the avg over the last 4 qtrs have been only 2.65%, while the 8 1tr avg has been about 4.25%.

For those looking to play just the event, the stock does seem poised for a breakout on a beat and raise, with new 52 week highs about 5% above current levels.  On a miss and guide lower, $40 could serve as near term support, but given the apparent negative predisposition by tech investors, I would expect a test of the 200 day moving avg at $39.50 which also matches the implied move to the downside.

Without a strong view on the current quarter or guidance for those looking directionally, it may make sense to look at October options as there are a couple catalysts on the horizon.  On Sept 28th, the company will hold its annual Oracle OpenWorld 2014 user conference and then on October 2nd they hold their annual analyst meeting.

I would make two points – 1)  could the disappointment in the typically strong fiscal Q4 have caused push-outs of business that was booked in Q1, providing upside to consensus?  2)  and is it likely that the company has some positive product news to roll out at the user conference and save just a little bit of color on FY 2015 guidance at their analyst meeting?

For those positively disposed and think that the earnings plus the two other corporate events could serves as positive catalysts, then it could make sense to look to near the money calls in an expiry that captures all events:

Hypothetical Trade: ORCL ($41.25) Buy Oct 3rd weekly 42 Calls for .50
Break-Even on Oct 3rd weekly expiration:

Upside: would be at 42.50 on the upside, below the 52 week highs

Downside: between 42.50 and 42 lose up to .50, below 42 lose full .50 or 1.2% of the underlying stock price.

Rationale:  These calls offer a break-even up about 3%, and risk only 1.2% of the underlying stock price.  For bulls this is a fairly cheap (premium terms) defined risk way to play for a catch up.