$ORCL – Stayin’ Alive is No Jive

by CC March 15, 2016 2:18 pm • Commentary• Trade Ideas

Oracle (ORCL) is set to announce their fiscal 3rd quarter results after the bell today. Dan previewed the event yesterday. We wanted to go over some trade ideas for those looking to play the event or for those that own the stock. And use a couple of trade structures that we don’t often highlight but are of interest in a big cap name like this that is unlikely to have that big of a move (outside of its expected move). And therefore this is a good educational exercise not just for ORCL but similar holdings as well on how to use ratio spreads against long stock positions.

First, for those that own the stock and would be more than willing to buy more near its recent lows there’s a way to do that while also providing a bit of downside protection, for no cost. Here’s how:

Versus 100 shares of ORCL (38.50) Buy the March 37/36 1×2 put spread for even money
  • Buy 1 March 37 put for .42
  • Sell 2 March 36 puts at .21 (.42 total)

Break-evens on March expiration (this Friday):

Losses and gains in the stock higher and lower but between $37 and $36 your shares are hedged for that dollar drop in the stock. Below $36 you are put the stock (based on the extra 36 put sold) but the purchase price in the stock is at an effective price of $35 (near the recent lows). You then have additional losses below $35 if the stock were to be lower than that on Friday as if you bought more stock at $35 against the shares you already own.

Rationale – This is an interesting overlay on existing shares for those that don’t mind buying near lows in the stock for a core position. The most likely thing that happens is ORCL is either higher (good!) or unchanged (fine) or slightly lower (no big deal). But if it is a lot lower this provides a little protection between $36 and $35 (better than a stick in the eye) and below $35 you must be willing to buy more stock but that is a lot lower so it almost acts like a GTC order at $35 into Friday. The best part of it is there’s money spent (although margin must be used on the extra short put as if there was a GTC buy order below).

 

Now let’s look the other way. Let’s say you scooped ORCL well near the lows and would love to book the profits on a pop higher. Or let’s say you bought ORCL higher and would love to get out of the position on a pop higher. You can do a 1×2 call spread to the upside and add leverage up to the point where you’d be willing to sell the stock anyway. Here’s how:

Versus 100 shares of ORCL (38.50) Buy the March 40/41 1×2 call spread for .05
  • Buy 1 March 40 call for .37
  • Sell 2 March 41 calls at .16 (.32 total)

Breakeven on March expiration (this Friday):

Profits and losses above and below on moves on the long stock, but above $40 there is leverage up to an additional .95 (nearly 2.5% of the underlying). Above $41 you have sold your stock, but at an effective price of $41.95. Therefore this is only for those looking to sell higher. A sale at $41.95 is more than 6% higher. This of course does not hedge the shares in any way. This just adds a bit of leverage on a pop for those willing to sell higher and if the stock is above $40 but below $41 that leverage comes without being called away in any shares and can just be added to the profits you already have on the move higher. The most likely scenario is losing the .05 paid for the opportunity.