Oracle's Earnings Disappointment: A Buying Opportunity For Investors

Oracle Corp (NYSE:ORCL), a leader in enterprise software, experienced substantial fluctuations during the after-hours trading on Monday after announcing disappointing earnings. For the fiscal second quarter, the company reported adjusted earnings per share (EPS) of $1.47. This figure was below analysts' expectations, which had set the consensus at $1.48. Additionally, Oracle's sales reached $14.06 billion, falling short of the anticipated $14.11 billion.

The situation was made more challenging by the fact that, prior to the earnings report, Oracle's stock had shown promising signs, trading above its five, 20, and 50-day exponential moving averages.

It is essential to acknowledge that the outlook seems grim. However, it is equally vital to consider how infrequently Oracle experiences significant declines. Out of the 1,238 trading sessions over the past five years, only 15 sessions recorded a drop of more than 5% in day-to-day trading.

While the idea of incurring losses is certainly unappealing, unless there is strong evidence indicating an impending prolonged downturn, a bullish stance may be more justified.

Understanding the Data

Although it is tempting to interpret the unfavorable Q2 earnings as a negative signal, relying on hard data may provide a clearer perspective. Historical data suggests that ORCL stock tends to have an upward trajectory over time.

In fact, established companies like Oracle are generally considered less volatile and exhibit consistent performance. Therefore, it is generally wise not to go against market trends, particularly for blue-chip technology firms.

Looking at the weekly performance over the last five years, Oracle stock has demonstrated about a 55% probability of yielding positive returns in any given week. While these numbers favor long-term investors, a significant 45% failure rate remains, indicating a possibility of loss. However, investors can use multi-leg options trading strategies to enhance their chances of success.

Using the Bull Call Spread Strategy

Instead of simply purchasing a call option on Oracle, which can be quite expensive due to the stock's higher price tag, traders can consider employing a bull call spread. This strategy involves simultaneously selling a call option at a higher strike price. The premium received from selling the short call reduces the overall cost of the long call.

This strategy may limit the maximum potential gains due to the strike price of the short call, but it also lowers the breakeven point. In some cases, this can bring the breakeven price below the current market level.

For instance, if traders define success not by needing a greater than 0% return, but rather as achieving a return greater than a 0.5% loss weekly, the probability of Oracle stock yielding some form of success exceeds 60%—a more favorable position than the previous 55% win ratio.

The current bull call spread at $172.50/$175.00—buying the $172.50 call while selling the $175 call—offers a maximum profit of $81 for every $169 risked, equating to a return of 47.93%. Furthermore, this trade's breakeven price is $174.19, approximately 0.97% below its recent trading price. If success is calculated merely by not falling more than 0.97%, the likelihood of profit rises to about 65.5%. In this scenario, Oracle's stock needs to maintain the $175 level for investors to realize the full potential of their investment.

Overall, while Oracle's financial reports may not appear as promising at first glance, they present a potential buying opportunity for investors willing to navigate the market intelligently.

Oracle, Earnings, Investing