Options Trade – Oracle Corporation (NYSE:ORCL) Puts
Wednesday, December 17, 2014

**OPTIONS TRADE: Buy the ORCL Feb 2015 40.000 put (ORCL150220P00040000) at or under $1.30, good for the day. Place a protective stop loss at $0.50 and a pre-determined sell at $2.50.

by Ian Harvey

December 17, 2014

Introduction

Analyst expectations ahead of Oracle Corporation’s (NYSE: ORCL) -- which develops, manufactures, markets, hosts, and supports database and middleware software, application software, cloud infrastructure, hardware systems, and related services worldwide -- fiscal Q2 earnings, to be released after the close today, appear mostly muted as the enterprise software giant continues to transition to the cloud computing.

Priced at 13.57x this year’s forecasted earnings, ORCL shares are relatively expensive compared to the industry’s 7.85x forward p/e ratio.

Technically, Oracle stock has been in decline during the past week, with shares retreating from staunch overhead resistance in the $42 region. The pullback saw ORCL dip below key technical support at its 200-day moving average on strong volume.

Stocks that begin to experience a breakdown can lead to potentially massive losses. Once psychological and technical resistance barriers like the 200-day moving average are breached on higher than normal relative volume, the stock may then be subject to emotional selling from investors that can continue to drive the stock lower. Regardless of the impetus behind the price and volume action, when a stock moves with weakness and volume it can indicate the start of a new, potentially dangerous, trend.

The stock’s only bright spot in the past week came from the brokerage community, where Morgan Stanley upgraded Oracle stock to “overweight” from “equal weight” citing “improving results in secularly important portions of the business.” Morgan Stanley also lifted its price target to $50 from $45.

In their report dated Dec. 15, 2014, Sterne Agee analysts Robert Breza and Ryan MacDonald said their channel checks since the last earnings report suggest Oracle’s report will be in line with expectations. They note the company has an easy comparison, which should help, although sentiment on Oracle shares remains low.

For Oracle’s second fiscal quarter, they’re expecting revenue of $9.475 billion and earnings of 70 cents per share. That’s compared to the consensus estimate of $9.503 billion and 68 cents per share in earnings. The Sterne Agee said the drivers of their differences with consensus are slower new software licenses and better cost controls.

Their estimate for Oracle’s third fiscal quarter is in line with consensus estimates of $9.685 billion and earnings of 73 cents per share. They expect management’s guidance to be in line with those numbers as well.

The Sterne Agee analysts are expecting Oracle to post $2.092 billion in new software license revenue, compared to $2.383 billion in the same quarter last year. In software licenses, they expect $4.805 billion in revenue, compared to $4.517 billion in last year’s second fiscal quarter.

They project service revenue of $1.348 billion, a 28% increase, and hardware revenue of $1.23 billion, a decline of 7%. Their checks suggest demand for Oracle’s products is strong in North America, particularly for its database and middleware products. They say demand Europe has shown to be soft, however, for new software and applications.

Conclusion

It is believed that the majority of investors have low expectations and that new investors are staying out of Oracle stock until the company starts showing internal growth again. However, they note that headwinds from foreign exchange rates will likely weight on the company’s results while it improves execution. Oracle's top-line growth has slowed dramatically over the past four years, from mid-double digits in 2010 to low-single digits last quarter and is not expected to improve. A deeper look at the financial statements of Oracle reveals that enterprise sales are simply not performing as well as they used to.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the ORCL Feb 2015 40.000 put (ORCL150220P00040000) at or under $1.30, good for the day. Place a protective stop loss at $0.50 and a pre-determined sell at $2.50.



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