Premium on Oracle Puts Pops as Stock Drops

Oracle will report earnings after next Tuesday's close

Jun 14, 2018 at 3:23 PM
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Oracle Corporation (NYSE:ORCL) is sitting out the day's broader rally in tech stocks, thanks to a pair of bearish brokerage notes. For starters, J.P. Morgan Securities downgraded the stock to "neutral" from "overweight," and lowered its price target to $53 from $55, saying the software company is losing market share in the cloud space to larger firms like Amazon (AMZN) and Microsoft (MSFT).

Likewise, Nomura cut its price target on ORCL to $60 from $64, and lowered its fiscal 2019 revenue forecast, citing a more modest pace in growth. Oracle is due to release its fiscal fourth-quarter earnings report after the market closes next Tuesday, June. 19.

At last check, ORCL stock has plunged 4.5% to trade at $46.10. The shares have now shed 14% since their mid-March record high of $53.48 -- and are pacing for their lowest close since May 9.

orcl stock daily chart on june 14

Against this backdrop, ORCL options volume is soaring today, with around 54,000 calls and 47,000 puts on the tape -- five times what's typically seen at this point in the day. The top strike is the weekly 6/22 42.50-strike put, and it looks like traders may be selling to open these out-of-the-money options. If this is the case, they're either setting a short-term floor for Oracle, or hoping to capitalize on a post-earnings volatility crush.

Elsewhere, buy-to-open activity has been detected at the July 49 call. Based on the option's volume-weighted average price of $0.09, breakeven for the calls buyers at the close on Friday, July 20, is $49.09 (strike plus premium paid).

With earnings on the horizon, it's getting pricey to purchase premium on the tech stock. In fact, Oracle's 30-day at-the-money implied volatility of 26.8% ranks in the 90th annual percentile, meaning elevated volatility expectations are being priced into short-term options.

Plus, the security's 30-day implied volatility skew of 15.7% ranks higher than 94% of all comparable readings taken in the past year. This indicates puts are commanding a higher volatility premium than calls at the moment.

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