NOTE: This blog articulates a complex options strategy known as a Short Strangle. It is recommended only for sophisticated investors who understand the risks involved.
Oracle (ORCL) – which reports earnings this afternoon – is a stock I have followed closely for the last couple years ever since Eric Savitz wrote a front page article for Barron’s arguing that ORCL was an underappreciated cloud play. I made good money on it last year and have traded it this year.
However at a current price of $80 I see no edge long or short ahead of earnings this afternoon. So why am I writing a blog post? Because you can make money from my view that ORCL is unlikely to move much in response to earnings this afternoon via an options strategy known as a Short Strangle.
In this strategy you sell both an out of the money call – to investors who want to speculate on upside – and an out of the money put – to investors who want to speculate on downside – and collect the premium. As long as ORCL trades within the range defined by the strike prices on the puts and calls you sell the options will expire worthless.
The options I favor selling are the ORCL $85 Dec16 Calls and the ORCL $75 Dec 16 Puts. Each can be sold for more than a $1. As long as ORCL trades between $75 and $85 at Friday’s close they will expire worthless. In other words you will collect the premium and have no liability. The risk – of course – is a big move in either direction outside of the range in which case the options will be in the money and the trade a loser.