Cloud infrastructure and software provider Oracle (ORCL) has been weathering the market’s recent storm better than most. While the broader market has struggled since the start of September – the S&P 500 is down 3% – ORCL has thrived, gaining 6%. In fact, the stock closed at a record high on Friday. That move pushed the shares above the top of a trading range between 85 and 92 that has been in place since early July.
ORCL’s recent earnings report on Sept. 13 was in line or beat both analyst estimates and guidance. The stock dropped 3% the day after the report, which is typical of the stock’s post-earnings performance. So is the subsequent strong recovery, as ORCL is up 9% since the initial drop.
Likely helping the cause were a few target price increases. It’s notable that analysts may be jumping on ORCL’s bandwagon. In September, just six of 30 (20%) covering analysts rated ORCL a buy or better. Today, 26 of 36 analysts (72%) are in the bullish camp.
We are playing a bullish put credit spread with the short put sitting just above ORCL’s 50-day moving average. This trendline will likely beak above the short strike at 90 in the next few days based on the stock’s recent strength.
If you agree that ORCL will stay above 50-day moving average ( (blue line in chart) line in chart), consider the following trade that relies on the stock remaining above 90 (red line in chart) (through expiration in six weeks.
to Open ORCL 19Nov 87.5 put (ORCL211119P87.5)
Sell to Open ORCL 19Nov 90 put (ORCL211119P90) for a credit of $0.45 (selling a vertical)
This credit is $0.03 less than the mid-point of the option spread when ORCL was trading above $94. Unless the stock rises quickly from here, you should be able to get close to this amount.
Your commission on this trade will be only $1.30 per spread. Each spread would then yield $43.70. This trade reduces your buying power by $250 and makes your net investment $206.30 ($250 – $43.70). If ORCL closes above $90 on November 19, both options will expire worthless and your return on the spread would be 21% ($43.70/$206.30).