Oracle (ORCL) stock was a bearish candidate that came up on one of my Barchart Stock Screeners that searches for stocks trading below the 20, 50 and 200-day moving averages.
Here are the full parameters for the screener and the results.
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Today, we’re going to look at a Bear Call spread trade that assumes ORCL will struggle to get back above the 150 level in the next few weeks.
A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility.
The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
ORCL Bear Call Spread
To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money.
Selling the November 20 call with a strike price of $150 and buying the $155 call would create a Bear Call spread.
This spread was trading for around $0.85 yesterday. That means a trader selling this spread would receive $85 in option premium and would have a maximum risk of $415.
That represents a 20.48% return on risk between now and November 20 if Oracle stock remains below $150.
If Oracle stock closes above $155 on the expiration date the trade loses the full $415.
The breakeven point for the Bear Call spread is $150.85 which is calculated as $150 plus the $0.850 option premium per contract.
Company Details
The Barchart Technical Opinion rating is a 88% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Oracle Corporation is one of the largest enterprise-grade database, middleware and application software providers. Oracle has expanded its cloud computing operations over the last couple of years. The company offers cloud solutions and services that can be used to build and manage various cloud deployment models. Built upon open industry standards such as SQL, Java and HTML5, Oracle Cloud provides access to application services, platform services and infrastructure services for a subscription. Through its Oracle Enterprise Manager offering, the company manages cloud environments. Oracle's software and hardware products and services include Oracle Database, Oracle Fusion Middleware, Java and Oracle Engineered Systems. Oracle Engineered Systems include Exadata Database Machine, Exalogic Elastic Cloud, Exalytics In-Memory Machine, SPARC SuperCluster, Virtual Compute Alliance, Oracle Database Appliance, Oracle Big Data Appliance and ZFS Storage.
Conclusion And Risk Management
One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $85, so we could set a stop loss equal to the premium received, or a loss of around $85.
Another stop loss level could be if the stock broke above $145.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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