Huge Unusual Long-Dated Call Options in Oracle Corp - A Covered Call ORCL Play?

Huge, unusual volume in Oracle Corp. (ORCL) call options that expire in just over two years may indicate some institutional investors are taking advantage of ORCL's weak stock price. It could imply a covered call ORCL play here.

ORCL is at $148.88 in midday trading today. The stock has tumbled since its last earnings report on June 10. After peaking at $248.15 on June 1, it hit a low of $114.99 on July 24 and is now up 30% from that trough price.

However, some institutional investors have gone all in. They may have bought a large amount of long-dated call options.

Unusual ORCL Call Options Volume

A Barchart report today shows that some investors bought over 4,000 call options at a super high out-of-the-money (OTM) strike price of $280.00. 

Note that these calls have 2 years to work out (760 days to expiry), allowing plenty of time for ORCL stock to rise 88% before there is any intrinsic value:

  $280 / $148.88 = 1.88 -1 = 88% out-of-the-money (OTM)

This is what is known as its “moneyness.”

Moreover, the volume is over 22 times the prior number of calls outstanding at that strike and expiring on Sept. 15, 2028. This is in today's Barchart Unusual Stock Options Activity Report.

Note that the premium paid by the buyers of these calls is $26.05. In other words, for this play to have any intrinsic value for buyers, ORCL has to rise to $306.05.

Moreover, the bid-ask spread is now $25.70 - $29.00, so the midpoint is $27.35. That makes the midpoint intrinsic breakeven point $307.55, or 106% over today's price.

So, are buyers really betting that ORCL will more than double from today's price? Maybe not.

What Analysts Say ORCL is Worth

Analysts have lowered their price targets in the last two months. As usual, as a stock falls, regardless of the underlying value in the company, they tend to reduce their prior targets.

For example, in my last Barchart article on ORCL stock on June 21, after its fiscal Q4 earnings release on June 10, I wrote that Yahoo! Finance's analyst had an average price target of $252.64.

Today, that survey average is down to $246.43. Similarly, Barchart's survey price target is down from $259.07 to $251.50. Even AnaChart's survey, which tends to cover more recent analyst writeups, has fallen from $286.30 to $280.44.

The average of these three survey price targets is $259.46. That's well below the two-year $280.00 call strike price for ORCL Sept. 15, 2028, call buyers.

As a result, it seems more likely that the initiators of these trades are existing ORCL investors. They may be selling covered calls. Let's look at that

Benefits of Selling Long-Dated OTM ORCL Covered Calls

For example, the midpoint premium of $27.35 represents an income yield of 18.37% over two years to a covered call ORCL seller:

  $27.35 / $148.88 = 0.1837 = 18.37%

That represents an annualized 8.82% expected return (ER):

  760 days / 365/yr = 2.082 years

  18.37% / 2.082 = 8.82% per year

In other words, existing ORCL shareholders can sell these covered calls and gain at least two benefits, and possibly three:

  1. Average annual income of 8.82%, even if ORCL stays flat

  2. Potential Upside of 93.26% (i.e., $280 strike price / $144.88 -1).

So, the total potential return is 102.44%, assuming ORCL rises to $280.00 in the next two years.

Moreover, this play also provides downside protection. That is a potential third benefit.

For example, the $27.35 income mitigates against any unrealized loss if ORCL were to drop to $117.35 ($144.88 - $27.35). 

That's 18.88% downside protection against a potential drop in ORCL stock. It's also close to the recent July 24 $114.99 trough price. So, you can see why investors might be willing to short covered calls at this price expiring two years from now.

The bottom line is that the likely initiators of this long-dated out-of-the-money call option volume are covered call sellers, i.e., existing investors in ORCL stock.