Yesterday we previewed Oracle’s (ORCL) fQ4 earnings (here) and suggested that for those who believe that strong trends in Q3 continued into their seasonally strong Q4, and guidance was to be good, then playing for a breakout with defined risk makes sense, here was the trade idea and rationale:
ORCL ($46.40) BUY JUNE 23RD (FRIDAY EXPIRATION) 47 / 50 CALL SPREAD FOR 70 CENTS
-Buy to open 1 June 23rd 47 call for 82 cents
-Sell to open 1 June 23rd 50 call at 12 cents
Break-Even on June 23rd expiration close:
Profits: up tp 2.30 between 47.70 and 50 with max gain of 2.30 above 50
Losses: up to 70 cents between 47 and 47.70 with max loss below 47.
Rationale: this trade risks 1.5% of the stock price for a break-even up 2.8%. The payout is potentially 3x if the stock were to rally 10% following results. If the stock goes up tomorrow it is likely to move up at least in line with the implied move as a breakout to new all-time highs would likely yield a greater than expected move.
Shares of ORCL are up nearly 9% on a beat and raise, with the stock now trading at a new all-time high. With the stock at $50.45 the call spread detailed above is worth about $2.75 for a $2.05 profit. At this point the call spread can only be worth $3 on Friday’s close and it makes sense to close the trade and move on.