Monday, December 14, 2009

The Oracle Calendar

In addition to options expiration, this week also ushers in a few earnings announcements from some big hitters including Best Buy, Research in Motion, and Oracle. During Friday night's Options Action, our option pundit pals highlighted a few spread trade ideas for each. Let's break down the calendar spread mentioned for ORCL.

Due to a neutral to mildly bullish outlook, as well as relatively pumped up front month options, the suggestion was to enter a slightly OTM call calendar spread. With ORCL closing around $22.80 on Friday, the Dec- Jan 24 call spread was used as an example.

ORCL Friday Closing Price- $22.78
Buy (1) Jan 24 call for $.30
Sell (1) Dec 24 call for $.15
Net Debit = $.15

As is usually the case heading into earnings, the front month options were trading at a much higher volatility level than second month. Currently the Dec 24 call option is at a lofty 48% and the Jan 24 call is at a mere 28%. Entering a calendar is one way to exploit the volatility skew in these front month options. Think of it this way- you're buying 5 weeks of time for $.30 (approximately $.06 per week), while selling 1 week of time for $.15. This is a reflection not only of the vol skew, but also the acceleration of time decay.

Take a look at the risk graph:

[Source: EduTrader]

Based on the risk graph, you can see the obvious best case scenario would be for ORCL to drift higher over the week and close on Friday just shy of $24.

1 comment:

Penny Stocks said...

Why is it that everybody buys the most popular stocks. If you do this your are doomed to get only average returns over time. Why not focus on decent companies that are extremely undervalued instead. I bought a stock called seaboard corporation About 7 or 8 maybe 9 years age something like that and paid 190 dollars a share. I sold my shares about 5 years later for 2500 hundred dollars. The company was profitable when I bought it and profitable when I sold my shares. keep in mind I would not say anything that I could not back up believe me. I will give an example of a compny of really decent quality that I consider really undervalued. The company is Bunge Limited symbol {BG} engages in the agriculture and also the food businesses worldwide. The stock currently trades around 60 dollars a share. I think the stock could easily get to 450 dollars a share over the next five years. Yes you heard right four hundred and fifty dollars a share assuming their are not stock splits. And what do I base this on If the companies profit margain expands from around 1.75% to 4% over the next five years and if the sales of the company expand from 55 billion to 85 billion thats about 7or 8 percent a year and if the companies stock than trades at a price earnings ratio of 20. Keep in mind that their are stocks that are popular that trade at much higher price earnings ratios than 20 times earnings one example is whole foods market it currently trades at 35 times earnings. Any stock broker or CPA or financial planner that knows how to value stocks will confirm everything that I have said in this comment.