ORCL Earnings Ideas, Long Alternative & Hedge

by riskreversal December 15, 2016 1:56 pm • Trade Ideas

Earlier, we previewed Oracle’s (ORCL) Fiscal 2Q earnings due after the bell. Here’s what we had to say in conclusion:

The most likely outcome in my opinion is that the stock is up or down about $1 -$2, but likely skewed to the downside. We’ll follow up with some trade ideas for those long the stock, and who want to be long the stock with defined risk.

Shortly before noon there was an opening, apparently bullish trade in Jan 6th weekly expiration, when the stock was $41 a trader paid 52 cents for 7,600 of the 42 – 45 call spreads. This trade breaks even at $42.52, up nearly 4% in 3 weeks, with a max gain of $2.48 up to $45, the high end of the first 6 months in 2015:


We thought we might offer some long stock alternatives, and a hedge for those already long:

First, for those that are long the stock, a breakout above that $42 resistance is what you’re in the game for. Risk to the downside down to 38 in most cases, below that there’s little support for a while.That helps us determine how to target moves higher while defining risk…

Long Stock Alternative to 100 shares:

If you are considering to play for a breakout, above $42 following tonight’s results you might consider a zero cost Risk Reversal.

ORCL ($41) Buy Dec 16th (tomo) 40 / 42 Risk Reversal for even

  • Sell 1 Dec 16th 40 put at 38 cents
  • Buy 1 Dec 16th 42 call for 38 cents

Break-Even on Tomo’s close:

Profits: above 42

Losses: below 40

Mark to Market: as the stock moves higher towards the long strike prior to expiration the position will show gains, and as it moves lower towards the short put strike the position will show losses. If the stock is between $40 and $42 on tomorrow’s close the trade has no profit or loss.

Rationale: you would do this only if you were willing to suffer loses below $40 (less than the implied move) or willing to be put the stock there if the stock was $40 or lower on tomorrow’s close. And willing to forgo any gains up until 42. The main point would be to play for an out-sized move to the upside allowing for some slippage on the long entry after a sharp run in the stock over the last week.  This trade should be attractive to those who think a breakout at $42 could propel the stock much higher as investors look for tech stocks like ORCL, that are well below their all time highs to play catch up to the broad indices.

A second stock alternative is to define risk. In this scenario you can help finance at the money calls into the new year, by selling a shorter dated out of the money call

Defined risk stock alternative in lieu of 100 shares:

ORCL ($41) Buy Dec30th 43/Jan 41 vertical call calendar for .85

  • Sell 1 Dec 30th 43 call at .25
  • Buy 1 Jan 41 call for 1.10

Rationale – The implied move on earnings is about 1.55. This reduces total risk to .85 (that’s the most that can be lost on a big move lower) while offering participation like stock above the breakout level of 42 (and break-even level of this trade 41.85). On a move higher the worst thing that could happen is the stock is significantly above the short Dec30th 43 strike, but even in that case the profits would be 1.15 vs the .85 risked. The ideal situation is a move higher but still below the 43 level. In that case the short Dec30th call would expire worthless and the Jan call would be in the money and close to 100 deltas to start the year, at a deep discount to where it would be trading, and coming with a risk profile of just .85 vs unlimited in the stock. These vertical calendars are nice defined risk trades for those looking to be long a stock into event, not looking for a home run on the event itself, but a way to be long the stock coming out of the event without the risk of stock.

So now to hedging existing shares. When hedging you are looking for either disaster protection, or maybe paying a little for closer protection. Let’s look at closer protection:

Hedge vs 100 existing shares

Buy the ORCL (41) Dec 40/38 put spread 43.5 call collar for .20

  • Sell 1 Dec 43.5 call at .10
  • Buy 1 Dec 40 put for .37
  • Sell 1 Dec 38 put at .07

Rationale – this 3 legged structure protects below $40 down to$38 support and costs .20, offering up to 1.80 in protection. The stock could be called away above 43.50 but that is 6% higher when the implied move is less than 4%. This hedge expires on Friday so it is strictly protection against an earnings move lower. For those that want larger disaster protection a simple collar makes sense, either selling the 43.5 call to buy the 40 put for .27, or tightening up the call sale to the 43’s, but that of course costs more than the 3 legged structure, or is forced to tighten up the call away short call strike.