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Oracle earnings preview. Expected move and ways to play.
3 min read

Oracle earnings preview. Expected move and ways to play.

Oracle earnings preview. Expected move and ways to play.

Overview

  • Oracle (ORCL) reports q4 earnings tomorrow, immediately after the close
  • Consensus EPS $1.17 on revenue of $10.85 billion.

The Set-up

The stock has been sideways and within a tight range (between 51 and 55) for the past 2 months. Which is pretty amazing considering it held in a similar range, around the same area, for almost half a year before the steep sell-off and recovery with the market in March and early April. Take away the Covid selloff down to $40 and this stock has basically flatlined since last Summer in the mid 50's.

The options market is pricing a move outside of that recent range over the next few months but not on earnings itself. To get a sense of what options are pricing, below is the 3 month expected move, followed by the one month, then the one week, from Options AI Technology:

Ways to Play

If one was thinking this earnings event is unlikely to break the stock out of range, one can sell the move entirely, or simply pick a realistic move in one direction, and express that by selling the other direction. I'll explain.

Neutral - The first trades I want to look at are simply selling that 1 weeks expected move. Here's a neutral target and the iron condor it produces:

That is pretty good risk reward of about 1/1 that the stock stays within that $51 to $55.5 range ad of course any close between 51.50 and 55 on Friday means maximum gain.

For those with a directional bias I also think it makes sense to consider "selling the move" to express a direction.

Bullish - For instance, a bullish price target in line with the expected move can sell a put spread to the bears. Here's an example, selling this Friday's 53/51 put spread:

Bearish - The same for those that are bearish would be selling the 53.5/55.5 put spread.

In both cases notice that the losses are stopped out at the expected move, but the breakeven is much closer. So there is a difference in selling premium to play for direction. You don't get the advantage of selling both moves, only one. so if you are wrong on direction and the stock moves inline with expectations you could lose the entire risk. However the risk/reward and the probability accounts for that. You can be right on direction, and make max gain, you can even be "wrong" and the stock goes nowhere and still make money, and it could even go against you a little bit, and still make money. That's where the higher than 50% probability of profit comes from. Of course, you need to risk more to make less for those higher odds.

Summary

There are multiple ways to use short premium spreads, both directionally and neutrally into an event. In the case of a short put spread you are "selling to the bears" and bullish. In the case of a short call spread, you are bearish, and "selling to the bulls" to express that. In the case of a short iron condor or butterfly, you are neutral and "selling to both the bulls and the bears."

Actionable Insights from the Options Market

Earnings event expected moves
Unusual activity alerts
Spread trade education

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