In late February we took a look at Oracle’s (ORCL) stealthy rally in 2017 and looked to isolate the upcoming catalyst of Q3 earnings, due after the bell on Wednesday. Here were some thoughts on the stock and a trade idea at the time, from February 22nd:
Bullish/ Stock Alternative/ Replacement
ORCL (42.30) Buy the March10th weekly / March24th weekly 42.5 call calendar for .50
- Sell 1 March10th 42.5 call at .35
- Buy 1 March24th 42.5 call for .85
- Rationale – ORCL has run up $2 in a straight line. Entries at this point are risky and for those that have been long the stock, defining risk at this point into the event makes sense. The implied move on earnings is more than 1.50, so this position risks less than 1/3 of that move. It’s breakeven is 43 (after the March 10 calls expire) but risk can be further reduced after March 10th decays or becomes worthless. The idea here is that we’ve financed a breakout play that captures earnings, while selling a close to the money call after the recent run-up in the stock. This reduces delta exposure until the event itself, and protects against a pullback in the stock before then. The biggest risk to the position is a big move higher or lower between now and the 10th as the call calendar will do best if the stock stays near this area with the best case scenario slightly higher at 42.50.
What we’ve seen is a slightly higher stock into the event, it closed at 42.68 on the short call’s expiration and is basically at the same spot today and the entire trade is worth 0.75 versus the .50 initially paid (if the short call was left to expire the short stock should now be closed and rolled into a short call) It can either be closed now for a profit or rolled to set up very cheap upside exposure into earnings. For the roll, selling the March24th 44.5 call at .20 fits the bill:
ACTION – Sell to open the March24th 44.5 call at .20
New Position: Long the ORCL (42.65) March24th 42.5/44.5 call spread for .30 (currently worth .75)
Breakeven on March24th expiration:
- Losses of up to .30 below 42.80 with total loss of .30 below 42.50
- Gains of up to 1.70 above 42.80 with a maximum gain of 1.70 at or above 44.50
Rationale – The entire trade idea can be closed here for a .25 profit, which isn’t bad. But for those wanting long exposre into the print we can reduce premium at risk to just .30, with potential profits up to 1.70.