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Here Is How You Should Play Oracle's Earnings This Week

Oracle Corporation (ORCL) provides products and services that address all aspects of corporate information technology (IT) environments, including application, platform and infrastructure. The Company's businesses include cloud and on-premise software, hardware and services. Its cloud and on-premise software business consists of three segments, including cloud software and on-premise software, which includes Software as a Service (SaaS) and Platform as a Service (PaaS) offerings, cloud infrastructure as a service (IaaS) and software license updates and product support.

It is reporting earnings on Wednesday, March 15, after market close: 

(Source: TD Waterhouse)

As evident from the above, the company beat earnings estimates in 50% of time in the last six quarters, showing in-line results in 13% of time, and underperforming in the rest of time. It has seen modest volatility and a strong uptrend in the market price of its stock over the last three months:

$ORCL, Oracle Corporation / D

The market participants expect the following numbers over the next few quarters, including the upcoming one:

(Source: TD Waterhouse)

Market data show that the one-week options are overvalued:

(Source: TD Waterhouse)

The one-week straddles (at-the-money options with a strike price of $42.50 and expiring on March 17, 2017) are worth around 2.9% of the current market price of the stock (including the calculation of the options' moneyness). Historically, the stock has been less volatile than that on a weekly basis over the last year:

(Source: Google Finance. Calculations by author)

As you can see, the stock has had a weekly standard deviation of around 2.2% over the last 52 weeks, while the straddle expiring in three days has an implied weekly volatility of around 2.2% (calculated based on 3 calendar days remaining until expiration), also including volatility from the earnings event this week. I therefore see signs of overvaluation in these options.

Hence, selling the straddles is a good idea from a theoretical standpoint.

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