Oracle’s earnings impact creates a hidden contrarian opportunity Oracle’s poor earnings impact creates a hidden contrarian opportunity for traders – Oracle (NYSE:ORCL)

Strong supporter of enterprise software Oracle Corporation ORCL There was significant volatility in Monday’s after-hours trading session following the release of disappointing financial results.

The company reported fiscal second-quarter adjusted earnings of $1.47 per share, missing Wall Street’s consensus estimate of $1.48. Additionally, sales were $14.06 billion, missing estimates of $14.11 billion.

To make matters worse, ORCL stock saw a strong bullish move just before the disclosure. Specifically, Oracle stock is trading above the 5-day, 20-day, and 50-day exponential moving averages.

To be fair, things don’t look promising. However, it’s also important to realize how rare it is for Oracle stock to experience serious negative trading. Over the past five years, there have been 1,238 trading days. Of this huge number, only 15 trading days had a daily decline of more than 5%.

Of course, no one wants to incur crimson ink. Still, unless there is compelling evidence that a long-term recession is imminent, a bullish stance remains the more reasonable approach.

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Stick to empirical data

While it’s tempting to read between the lines of Oracle’s sketchy second-quarter earnings report, it’s better to trust the empirical data. In fact, it’s these numbers that suggest ORCL stock has a bullish bias.

The market itself exhibits an upward bias over longer periods of time, as several experts have proven. This framework is well suited for mature entities such as Oracle. So as a general approach, it’s prudent not to go against the broader market, especially when it comes to blue-chip tech giants.

Interestingly, over the past five years, ORCL stock’s weekly performance (determined by the difference between Monday’s opening price and Friday’s closing price) suggests that in any given week, Oracle has about a 55% chance Achieve positive returns. In the long run, assuming strict money management, speculators are unlikely to win.

However, the above success rate also translates into a failure rate of approximately 45%. This is quite steep, meaning a period of misfortune can lead to ruin. Nonetheless, one underappreciated aspect of multi-leg options trading is that speculators can artificially adjust the parameters for success.

Deploying Powerful Bull Call Spreads

Instead of simply buying an Oracle call option (which can be expensive for many retail investors due to the stock’s three-digit price tag), traders can simultaneously sell a call option at a higher strike price. The idea is that the credits received from the sale of the short call help offset the debits paid by the long call.

Granted, this approach means that the maximum reward is limited by the threshold represented by the short call strike price. On the plus side, a clear benefit of a bull call spread is the ability to lower the breakeven point, sometimes even below the current market price.

In other words, options traders no longer need to adhere to a consensus definition of success; that is, securities that return greater than 0%. Instead, for example, success could be defined as a weekly return greater than a half-percent loss.

Within this framework, ORCL stock’s odds of at least some success jump to over 60%. That’s obviously better than a 55% win rate, but it can get better.

At this moment, 172.50/175.00 Bull Call Spread (i.e. buying the $172.50 call and selling the $175 call) returns up to $81 per $169 risked, or a payout ratio of 47.93%. Furthermore, the breakeven price of this transaction is $174.19, which is approximately 0.97% lower than the current market price.

If the threshold for success is defined as a weekly gain greater than a 0.97% loss, then the probability of profit is approximately 65.5%. Likewise, ORCL stock doesn’t need to rise significantly from here on out. Just stay at $175 or above to claim the full reward.

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