Name That Trade – $ORCL

by Dan June 17, 2015 3:38 pm • Commentary

THIS WAS THE TRADE THAT I WAS GOING TO POST ON AT 2PM WHEN ORCL WAS $42.60.  UNFORTUNATELY OUR SERVER WENT DOWN AND WAS UNABLE TO DO SO.  THE STOCK IS UP 60 CENTS SINCE, SO WE ARE NOT DOING THE TRADE, THE STRIKES NOW A LITTLE TIGHT, BUT THOUGHT POSSIBLY USEFUL FOR EDUCATIONAL PURPOSES.  WE WILL TAKE ANOTHER LOOK TOMORROW MORNING.

[HR]

On Monday I took a quick look at the set up into ORCL’s fiscal Q4 results due tonight after the close (read below). While the stock’s consolidation has been fairly consistent with that of the broad market of late, I suspect it will take a meaningful beat and raise or miss and guide down for the stock to break above technical resistance at $46.50, or below technical support at $42.

With just a couple hours to the report, the implied move has come in a bit since Monday, with the stock at $44.55 the June 19th 44.50 straddle (the call premium plus the put premium) is offered at 1.75, if you bought the move in the form of the straddle, then you would need a move above $46.25, or below $42.75. As stated above, I suspect that would be a stretch.

But I do think the diferences in vol (at the previous high strike of 46) between the front month and late summer allows us to finance a breakout over the Summer while fading the event itself:

Trade – Bought the ORCL ($44.60) June/August 46 call calendar for .57

– sold 1 June 46 call at .30

– bought 1 August 46 call for .87

Break-evens on June expiration: losses or gains depend on the event move with any flat to up move within striking distance of 46 immediately profitable. A move down or one significantly higher than 46 would result in losses. Following Friday’s expiration we are able to roll the calendar or spread it by selling a higher call in August dependent on where the stock is. Max risk is 57 cents
Rationale:  ORCL stock has been stuck in a holding pattern but it could attempt a breakout to new highs after the consolidation. We find it unlikely that it has too much of a gap higher on the earnings event itself. Therefore we like the idea of financing the 46 call in August by selling this week’s call.

[hr]

Original Post June 15th, 2015: Name That Trade – $ORCL in the Arena

Event: ORCL report fiscal Q4 results Wednesday after close, the options market is implying about 4% one day move which is shy of the 4 qtr avg of 5.25% and 8 qtr avg of 4.65%.

I will do a much more in-depth preview of the quarter prior to Wednesday’s print, but I quickly wanted to highlight some options activity that caught my eye today, a day where total volume is running almost 5x average daily, and calls are outnumbering puts nearly two to one.

Traded in the market today: When the stock was $43.76 there was a large bullish trade in July 24th weekly expiration,. A trader sold to open 11,500 July 24th 42 puts at 71 cents and bought to open 11,500 of the July 24th 44.50/ 47 call spreads for 71 cents, the trade was done for even money, costing nothing aside from commissions.

Break-evens on July 24th weekly Expiration:

Downside: trader would be put 1.15 million shares down at $42, with losses below on July 24th expiration, with mark to market losses prior if the stock were to move closer to the short strike.

Upside: trader has long exposure to the tune of 1.15 million shares between 44.50 and 47, with gains up to $2.875 million, max gain above $47 or higher on July 24th expiration.

Techncials could be one of the main reasons for the trade structure.

A quick look at the one year chart shows obvious technical resistance at the previous high of $46.70, with nearly equally obvious technical support down at $42, which is also just below the stock’s 200 day moving average (yellow):

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

One other reason for the trade structure that includes two short legs is the spread between realized volatility (white line below, how much the stock is moving) vs implied volatility (blue, the price of options). While IV is lower than last quarter, so is realized, and options traders appear to be a tad bit more cautious than that of those just in the stock, when considering the very tight consolidation the stock has been in for months:

ORCL 1yr chart of 30 day at the money IV (blue) vs 30 day at the money realized vol from Bloomberg
ORCL 1yr chart of 30 day at the money IV (blue) vs 30 day at the money realized vol from Bloomberg