Name That Trade – $ORCL: You’ve already made the choice. Now you have to understand it

by Dan March 11, 2015 4:05 pm • Commentary

Oracle (ORCL) reports their fiscal Q3 results next Tuesday March 17th after the close. The options market is implying about a 4.5% one day move which is shy of the 4 qtr average of about 5% (important to note that last qtr the stock rallied 10%).

The stock caught my eye as another stock, like CRM and KRFT (detailed earlier here and here), that has recently round-tripped a volume breakout, now down 11% from the 14 year highs made in December:

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

For those that think quality stocks are being unfairly punished in what has been a fairly shallow correction so far, these sorts of re-tracements could be attractive long entries, but the relative under-performance should also be concerning as ORCL has not confirmed one high in the S&P since December.

As for taking a view prior to earnings, I think it makes sense to give it a few more days as the recent bout of volatility could present a fairly oversold condition if the stock were to be closer to the December low of $40.  On the flip side for those considering a short, with the stock down $2.50 this month alone looks like a tough press…  

With the stock at $41.50, for those who think that the March 20th 41.50 straddle (long the call and the put) looks cheap at 2.10 given the environment we are in plus the earnings event, then long vol strategies could be the way to play prior to the event.  I would add that when I previewed ORCL’s Q2 in mid December when the stock was $41, the Dec 41 straddle was offered at about $2, and the stock move 10% as opposed to the 5% implied.  So the point here is not that the stock is going to move 10% following results, its that the at the money straddle will not likely decay much given the environment we are in and that vol is likely to increase a tad giving you some optionality prior to the event.

All that being said, long premium strategies are always a tough way to make money into events, as the chart below of 30 day at the money implied vol in ORCL shows the ramp into earnings which is likely to be above the last three earnings levels and will see a precipitous decline after:

[caption id="attachment_51869" align="aligncenter" width="600"]ORCL 1yr chart of 30 day at the money IV from Blomberg ORCL 1yr chart of 30 day at the money IV from Bloomberg[/caption]

For those who would not be scalping stock against a long premium / long vol strategy like owning a straddle we would likely avoid such strategies, but the trade structure highlights how we think about options prices into events.