Chart of the Day – $ORCL: There Is No Spoon

by Dan December 16, 2014 2:27 pm • Chart of the Day• Commentary

Oracle (ORCL) reports their fiscal Q2 results tomorrow after the close.  The options market is implying about a 5% one day move in either direction (the Dec 41 straddle is offered at ~$2, or about 5%, if you bought that you would need a move above $43 or below $39 to make money).

The stock has under-performance ytd, up about 7.5%, vs the Nasdaq Composite up about 10% and the large cap software peer Microsoft (MSFT) up about 22%.  ORCL’s under-performance has been reflected in its below market multiple valuation,  trading at 13.5x this year’s expected earnings. Which is also kind of the rub, they are only expected to grow 6% on a measly 3% sales growth.  So much like many large cap tech peers, the stock is cheap but their debt to cash ratio is higher, their dividend yield is lower (~1.15%) and the company has historically relied on acquisitions for growth.  At this point, with their inability to demonstrate some organic sales growth as they lag some competitors with cloud and security offerings there are takeover rumors of companies like SalesForce (CRM), Workday (WDAY) or even Fireye (FEYE) all of which would be expensive and dilutive.

From a technical standpoint, $40 on the near term seems like decent support, the level the stock stopped at last week, and also the 50 day moving average (purple):

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

Considering the implied move of $2, the chart sort of corroborates the range with overhead resistance of the June high just above $43 and the consolidation prior to the Oct panic low in and around $38.

Implied volatility is ticking higher and is now nearing historically normal earnings levels. Jan vol is about 28 heading into the event and is likely to get sold down to 20 or so afterwards:

2 yr HV30 (white) vs IV30 (blue) from LiveVol Pro
2 yr HV30 (white) vs IV30 (blue) from LiveVol Pro

The rise in volatility is market and earnings related as the stock itself has not been that volatile (blue line). That could change with a fall below the moving averages near $40.

The average one day move over the last  four quarters has been about 4%, while the 8 qtr avg has been about 5%, so the implied move of about 5% seems fair.  For those looking to take a directional view into the print, options seem reasonably priced, especially when you consider how the whippy the market has been over the last couple weeks.

We will look at trades prior to tomorrow’s close.  Stay tuned.