Name That Trade $ORCL: A 2×4 To The Head?

by Dan March 13, 2015 2:54 pm • Commentary

By now you probably get it. First it was IBM’s results and commentary on Jan 20th, then it was MSFT on Jan 26th, HPQ on Feb 24th and INTC yesterday, all issuing disappointing sales, citing a combination of adverse affects from the strength of the dollar and what seems to be a softening in the enterprise computing market.

Back in mid December Oracle (ORCL) reported their fiscal Q2 results that beat on earnings and sales on better than expected sales from cloud offerings (up 45% year over year.  At the time, the company suggested that the strength of the dollar “could adversely impact revenue by 4% and per share earnings by 4 cents.”

On Wednesday I took a look at ORCL trying to get in front of their earnings expected Tuesday after the close:

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%).

But it was the technical set up that caught my eye as the stock had pulled back to its 200 day moving average, filling in the entire earnings gap from December, and today bouncing:

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

If you are of the mindset that the stock’s 10% decline from 15 year highs in December, and the 6% decline on the year reflect the adverse affects of the dollar for the existing period, and the stock will be rewarded by continued gains in their cloud computing division, then $42 could be a fairly decent long entry.  (we will consider some trades Monday and Tuesday into the event).

Weird Trade:

But for those who like to track unusual options activity, a trade that just went up will thoroughly confuse you. When the stock was $42.18 a trader did the following:  

Bought to open the April 10th 42.50 / 44 1×2 CALL spread 9300 by 18,600 paid .03

and

Bought to open the April 10th 40.50 / 38.50 1×2 PUT spread 9300 by 18,600 paid .01

So breaking this down…..the trader thinks the stock is going to move, but didn’t want to spend a whole heck of a lot of premium to express this view, and is willing to lose on an extreme out-sized move….

For the call spread, the trade loses .03 if the stock is below 42.50, makes up to 1.47 between 42.53 and 45.47, with the max gain of 1.47 at 44.  But here is the thing, if the stock is above $45.47, up about 7.5% then the trader losses one for one as they are short 2x the amount of the calls that they own.

For the put spread, the trade loses .01 if the stock is above 40.50, makes up to 1.99 between 40.49 and 36.51 with a max gain of 1.99 at 38.50.  And again, if the stock is 36.51 or lower, down about 13% then the trader loses one for one as they are short 2x the amount of puts that they are long.

This is definitely a weird trade, and it is obvious that the trader is giving themselves a little more room for error on the down side vs the trade on the upside.  Translation they are less concerned with and outsized move to the upside vs the potential for an outsized move to the downside.

BUT. I suspect this trade is against a long stock position of 930,000 shares.  If this is the case the trader is adding very cheap leverage to the upside, if the stock is 44 or higher then the trader would have added 1.50 to the gains of the stock, or about 3.5%.  And they also have some very cheap protection against the long stock. paying a penny for up to 1.99 in protection between 40.50 and 38.50 and the worst case they would be put 930,000 shares of stock at 38.50, down about 9%, but would have mitigated 1.99 of losses.