Oracle Stock Has Spiked Ahead of Earnings Attracting Short Put Investors

Oracle (ORCL) stock has spiked from its lows last October given the company's solid earnings, free cash flow, and cloud wins for the quarter ending Nov. 30. Investors are increasing shorting ORCL stock puts as an income play ahead of next month's earnings.

Oracle will likely report its fiscal Q3 earnings for the quarter ending Feb 28 by March 13 or earlier. As a result, options premiums are rising, but they are especially skewed to the put side over calls. This indicates investors in the stock have a feeling that ORCL stock price could peak ahead of earnings.

Fundamentals Are Strong

Oracle is an extremely profitable company. In its latest quarter, operating margins on a non-GAAP basis were 41%. This is a very high margin number, albeit it was lower than 47% a year ago. 

Nevertheless, analysts project $4.91 in earnings per share (EPS) this year ending May 2023, and $5.68 next year. That puts ORCL stock, at $88.72 on Feb. 14, on a cheap forward multiple of 18x this year's earnings and 15.9x next year.

Moreover, free cash flow (FCF) is still extremely strong. Last quarter the company produced about $8.8 billion in FCF, which represented 95% of its net income. In other words, it is still gushing cash. And recently the company signed up new cloud customers of which the market is taking notice as it could keep that FCF growing.

Nevertheless, on a historical basis, according to Morningstar, ORCL stock is slightly higher than its average historical P/E multiple and has a lower-than-average dividend yield. This implies the stock could be peaking or might move.

As a result, put option premiums have been rising, making them attractive to short-put investors.

Shorting Out-of-the-Money ORCL Puts 

We like to highlight short-put side investments for cash-secured put writers when the put premiums are skewed higher than the same expiration period call options.

For example, the March 17 puts at the $80 strike price, which is almost 10% below today's price trade for 72 cents per put option. By contrast, the $97.50 strike price calls for March, which is a strike price that is 9.9% over today's price, trade for March 17 trade for just 52 cents. So investors at 10% away from today's price will make more money shorting puts rather than calls.

Moreover, the short-put investor will make a significantly higher yield. For example, the yield an investor will make on the put side is 0.90% (i.e., $0.72/$80.00). That works out to an annualized rate, assuming the investor can repeat the trade each month, of 10.8%.

By contrast, the covered call investor who shorts the $97.50 strike price calls will make just 0.586% (i.e., $0.52/$88.72), or 7.0% on an annualized basis.

As a result, shareholders who already own ORCL stock may either want to short OTM calls or else short put strike prices. But those that don't presently have a position might clearly find it more profitable to put up cash with their brokerage firm and short OTM strike prices to generate higher income. Even if ORCL stock falls, they have a chance to buy in at a lower price if their strike price is exercised.

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