ORCL Analysis

The enterprise software and services company Oracle Corp. (ORCL), headquartered in Redwood  City, California and best known for its database management systems, publishes earnings on Wednesday after the closing bell.

[ORCL in Wikipedia]

ORCL

I shall use the OCT series of options, which trades for the last time 30 days hence, on Oct 16.

Ranges

Click on chart to enlarge.

ORCL at 10:35 a.m. New York time, 30 days hourly bars

Implied volatility stands at 34.1%, which is 1.5 times the VIX, a measure of volatility of the S&P 500 index. ORCL’s volatility stands in the 72nd percentile of its annual range.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	42.07	45.82	40.03	42.51
Lower	34.57	30.82	35.14	34.13
Gain/loss	9.8%	19.6%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

My top priority for an earnings play is to build a position that covers the maximum range of one-day post-announcement movement for the past year. Most other criteria, I'm willing to fudge. The earnings range? Not so much.

Iron condor, short the $42 calls and long the $43 calls,
short the $34 puts and long the $33 puts,
sold for a credit and expiring Oct. 17.
Probability of expiring out-of-the-money

OCT	Strike	OTM
Upper	42	90.2%
Lower	34	84.9%

The premium is $0.13, which is 13% of the width of the position’s wings.The stock at the time of analysis was priced at $38.30.

The risk/reward ratio is 6.1:1.

The zone of profit in the proposed trade covers an $4 move either way. The biggest immediate move after each of the past four earnings announcements was $4.19, and the average was $2.34.

Decision for My Account

The risk/reward ratio is too high for me to take this trade. I could increase the reward by narrowing the zone of profit, but that would increase the risk since the probability of expiring out of the money would. I could also widen the wings to increase the reward, but that would also raise the risk by increasing the maximum potential loss.

All in all, a bad deal. I won't be trading ORCL prior to its earnings announcement.

-- Tim Bovee, Portland, Oregon, Sept. 16, 2015

References

My volatility trading rules can be read here.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.