Oracle Corp. (ORCL) stock fell after its fiscal Q4 June 10 earnings release, showing negative free cash flow (FCF), despite higher operating cash flow. It expects a 25% higher capex ($70 billion vs. $56 this past fiscal year ending May 31) for the next fiscal year, as well as a new $20 billion equity raise, as reported by CNBC.
As a result, one of the only ways investors may be able to make money with ORCL is to sell short out-of-the-money (OTM) put options. The market has pushed up put option premiums so high that they are worth shorting for the high yields they provide. This article will describe that play.
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ORCL stock - last 3 months - Barchart - June 18 ORCL closed at $184.29 on Thursday, June 18, well off from its June 10 price of $201.26 and a recent peak of $248.15 on June 1.
Shorting Prior ORCL Puts
I discussed shorting ORCL puts in a June 2 Barchart article, “Investors Bearish on Oracle Ahead of Earnings - Unusually Heavy ORCL Put Options Trading.”
The $190 put option expiring this Friday, June 26 (24 days in the future) had a latest price of $3.10. At the time, ORCL was at $241.50, so this put strike price was 21% below the trading price (i.e., “out-of-the-money”).
That gave investors an immediate income yield of $3.10/$190.00, or 1.63%. However, as of Friday, June 19, that put option premium is now “in-the-money” since it is higher than the stock price.
The premium is now $8.73. This means an investor who shorted these puts will now likely have their cash-secured collateral used to buy 100 shares at $190.00. However, their net breakeven point is $190.00 - $3.10, or $186.90. That is only $2.61 higher than the closing price last Thursday.
That implies an unrealized net loss of 1.40% (i.e., $2.61/$186.90). However, investors in this situation can repeat this play to help make up this unrealized loss.
Shorting New ORCL Puts
For example, put options at the $165.00 strike price, over 10% lower than its present price, expiring in 36 days, July 24, still have a high $4.25 midpoint premium. That means that a short-seller of this put option strike price can make an immediate income yield of 2.576%:
$4.25 / $165.00 = 0.02576 = 2.576%
ORCL puts expiring July 24 - Barchart - June 18, 2026 This means that an investor who posts $16,500 in collateral with their brokerage firm can enter an order to “Sell to Open” a put option at the $165.00. The account will then immediately receive $425.00 (i.e., $4.25 x 100 shares per put contract).
That also implies that, if ORCL were to fall 10.5% to $165.00 in the next month, the net breakeven will be even lower:
$165.00 - $4.25 = $160.75
That is 12.77% lower than last week's closing price. In other words, this provides a good potential buy-in point. Moreover, investors who shorted the $190.00 put and now have a 1.40% net loss can make up that loss by shorting this put contract.
Price Targets
Moreover, investors might have hope that ORCL has good upside. This is based on analysts' higher price targets.
In my last article, I suggested that ORCL could be worth more, but I declined to set a price target. I don't feel comfortable doing that until I can see that the company could potentially become free cash flow (FCF) positive.
However, other analysts have higher price targets. For example, Yahoo! Finance reports that the average of 43 analysts is $252.64 per share.
Similarly, Barchart's mean survey price target (PT) is $259.07, which is 40.6% higher. Moreover, AnaChart's survey of 32 analysts shows a 55% higher PT of $286.30.
The bottom line is that put options are high now due to excessive pessimism about ORCL stock.
That makes them worth shorting here with high short-put yields over the next month. Moreover, analysts have high price targets for ORCL for the next year.
On the date of publication, Mark R. Hake, CFA 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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