Oracle Corp Stock Is Treading Water - Ideal for Traders Shorting OTM Puts

Since Oracle Corp (ORCL) announced its fiscal year-end earnings ending May 30 on June 12, ORCL stock has essentially been treading water. This is ideal for traders who short out-of-the-money put options for income. 

For example, as of early trading on July 25, the stock is at $117.39, which is close to where it was on June 12 at $116.43.

FCF and Valuation

We discussed the company's earnings release in our article on July 12, “Oracle Corp Unusual Call Options Activity - Traders See It As An AI Play.” For example, we pointed out that its massive free cash flow (FCF) of $8.47 billion in its fiscal Q4 ending May 30 was up 68% on a year-over-year basis.

That shows that the company is a massive beneficiary of both cloud spending and now also will benefit from AI-related initiatives.

More importantly, the stock's relative valuation is still too low. Analysts forecast $5.56 in earnings per share for the year ending May 2024, according to Seeking Alpha. 

This means ORCL stock is cheap with a forward P/E (price-to-earnings) multiple of just over 20x. Other stocks like CrowdStrike (CRWD) at 68 times earnings and Palo Alto Networks (PANW) at 58.5x have much higher P/E multiples. 

Shorting OTM Puts in ORCL Stock

As a result, traders can take advantage of the stock's treading water by shorting out-of-the-money (OTM) puts. This helps create income for the trader while they wait for ORCL stock to move higher.

Granted, ORCL stock has a 1.36% dividend yield. But by combining owning at least 100 shares of the stock along with shorting OTM puts, the short-term trader can make additional income.

For example, looking at the Aug. 18 expiration puts shows that the $111.00 strike price put options have an attractive $83 cents premium. This means that the trader who shorts these puts immediately gains a 0.75% yield with just 24 days left until expiration.

Moreover, the strike price is over 5.1% below today's price, so there is a relatively low risk that the strike price will be exercised. 

That would mean the trader would have to buy the stock at $111.00. This may or may not mean the investor would have an unrealized loss. The additional income received lowers the breakeven price to $110.17, which is 6.2% below today's price.

For example, here is what this means exactly. First, the investor secures $11,100 with their brokerage in cash and/or margin (which could partially come from owning 100 shares of ORCL). Next, they can enter an order to “Sell to Open” 1 put contract at $111.00. The account will then immediately receive $110. 

This shows that the yield received is about 0.75% (i.e., $83/$11,100). If this can be repeated every 3 weeks for a year, the annualized return would be 12.7%, since there are over 17 periods of 3 weeks in a year.

The table above shows that there are other strike prices with good income possibilities lower than $111.00. That gives the OTM short-put trader a lower risk that they will be forced to purchase the stock. These lower strike prices require less secured cash and/or margin as well.

However, the bottom line is that there are good income opportunities here for patient traders/investors who believe that ORCL stock may be undervalued here.

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.