Yesterday, Dan previewed ORCL’s Q4 results and detailed a couple of defined risk trade ideas into the print. The two trades featured a bearish put spread targeting a a move of roughly 10% lower on a miss, and a dollar cheap contrarian bullish for those looking for a quick bounce. The dollar cheap bullish is worthless with the stock lower but the put spread had the move close to correct. Let’s check in on that trade for management purposes. From yesterday:
The stock is a hard press given how poor the sentiment is, but a miss and a guide down and the stock is down 10% in a quick.
Bearish trade Idea: ORCL ($46.25) Buy July 46 / 42 put spread for $1.10
-Buy to open 1 July 46 put for 1.45
-Sell to open 1 July 42 put at 35 cents
With the stock now 42.85 this put spread is worth about 2.65 versus the initial 1.10 at risk. It could be worth up to 4.00 if the stock is at or below 42 on July 20th. If the stock were to close where it is right now (42.85) it would be worth 3.15. In other words, decay (or theta) is now on it side. But profits are at risk if the stock were to bounce in the next few weeks. Therefore there are a couple of ways to manage the trade. The first is to simply take current profits, which are nice. The second way is to keep a stop on the trade if the stock were to go higher from here. On expiration, as long as the stock is 43.35 or lower the current profits will be what they are or more. If the stock were to stay here or go lower profits would be event more. Obviously that isn’t much room to the upside, so for those looking to take some risk off the table the best roll is probably to take the profits in the July 46 puts and roll this into a put calendar, by using the proceeds from selling the July 46 puts and use them to buy the September 42 puts. That roll (selling July 46 puts at 3.45, and buying the Sept 42 puts for 1.45 books .90 in profits and allows for much more to come if the stock closes near 42 on July expiration, then give the opportunity to make even more if it goes below that level before September.