Oracle Corporation (ORCL): the business software and hardware global giant is sliding over 2% to $29.48(3:19 PM EDT) after it beat the streets quarterly earnings expectations after the closing bell on March 20, 2012 (Q3 results ending Feb 29th).
In morning trade, Orcl stock popped to an intraday high of $31.15 a share and then reversed course to the downside breaking the important technical of $30 a share. Nearly 80,000,000 shares have traded hands on this tech giant before 3:26 PM EDT on a day of huge volume, in which investors/analysts have a mixed sentiment on the financial results of the company. Oracle beat analyst expectations by a slight percentage, coming in with $9.04 Billion in revenue for the quarter. The street had Oracle coming in with an estimated $9.02 Billion, which is only a small beat and may partially explain why the shares are sliding after a quick knee jerk pop to the upside this morning.
On a more positive note, Oracle had a very impressive gross margin of 78.9% and an operating margin of 37.8%. Non-GAAP earnings beat the street by 6 cents, coming in at $0.62 cents a share and the street had predicted Oracle to come in at $0.56 cents a share. Check out the chart below courtesy of Capital IQ to take a closer look at the Non-GAAP earnings results in more detail:
Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.
Despite the slide in Oracle shares today, I am still a raging bull when it comes to investing in this global technology giant. Larry Ellison is one of the smartest and richest Tech moguls on planet earth and I am very confident in the long term picture of continued profitability and share appreciation of this Bay Area Tech giant. I am maintaining my $37 price target for Orcl shares over the next 11 months and would be a buyer of the shares on this pullback. I think this is short term storm for and pullback in Orcl shares and presents a great long term buying opportunity for new investors and those looking to accumulate more shares for their core positions. A great entry point in the stock will be at a share price of $27.50 or less. Now, what is the Option play?! I like the longer term Call options and selling the near term Put options on Oracle.
Trade#1: I would consider selling the Oracle(ORCL) $29 strike Put Option for $0.90 cents a contract with an April 20, 2012 expiration date. Attached is Oracle Options Chains with an April 20, 2012 expiration date courtesy of YahooFinance: http://finance.yahoo.com/q/op?s=ORCL&m=2012-04. If I sell 20 Orcl Put Options for $0.90 cents each, I will credit $1,800 into my brokerage account ($0.90 cents x 100 shares per contract=$90 and $90 x 20 contracts =$1,800).
Remember, by selling the Put options, we are taking the big risk of potentially being exercised on the shares of Oracle at $29, if shares of Orcl stock are trading below $29 on the expiration date of these contracts. Therefore, we need to have $58,000 in cash in our brokerage account as cash collateral in the event that we get exercised on the 20 Put option contracts that we are considering selling. 20 contractsx$2,900($29 x 100 shares per contract)=$58,000. This is definitely not a trade for beginners, especially if you do not have the cash reserves to initiate the trade. However, I am a fan of this trade and a big long term bull on Oracle. In a worst case scenario, I am comfortable going long 2,000 shares of Oracle at $29 a share if I get exercised. By selling the Put options, I am in a sense financing $1,800 towards the potential eventual purchase of 2,000 shares of Oracle at $29 per share. By selling the Put Options, I am actually getting long the stock at $28.10 (net cost of $58,000-$1,800 credit=$56,200)because of the $1,800 that was initially credited to my brokerage account at the opening of this derivatives transaction.
Trade #2: I would consider buying the Oracle(Orcl) $29 strike Call Options with a Sept 21, 2012 expiration date for $1.25 a contract. Attached is the Orcl Options Chains with a Sept 21, 2012 expiration date courtesy of Yahoo Finance: http://finance.yahoo.com/q/op?s=ORCL&m=2012-09. I can buy 20 contracts for $2,500($125 per contract of 100 shares x20 contracts= $2,500 to open this trade) and that will give me long exposure on 2,000 shares of Orcl stock at $29 a share for the next several months. If the stock trades to $35 by the September expiration date, my initial $2,500 investment will be worth over $12,000. That would be beautiful return on our capital and I think that Tech stocks continue to lead this market rally higher in 2012!!! Lets go Orcl Bulls!! Remember, we need Orcl stock to decline another 5 or 6% in order for us to get an opportunity to buy these September 2012 Call Options for $1.25 a contract. Options take alot of patience and discipline to be successful in making money. Please remember to consult your investment advisor before buying or selling any equity securities/stock options. Good luck and stay tuned for more big action at http://www.Optionshoney.com.