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Oracle Corp (ORCL) is due to report its fiscal Q3 earnings on March 7 for the period ending Feb 28. ORCL stock still looks cheap here, given its strong free cash flow. Moreover, shorting out-of-the-money put options provides high yields and a way to set a buy-in target price.
ORCL is down today at $170.05, but still higher than when I wrote about it ($164) in my article on Jan. 21 ("Oracle Stock is Off Its Lows and Looks Cheap, Given Its Strong FCF").
In that article, I argued that ORCL is worth $190 per share based on its strong free cash flow. Moreover, analysts still have higher price targets as well. For example, Yahoo! Finance shows that the average of 36 analysts is $194.64 and Barchart's survey is $195.03.
So, ORCL stock still has a good upside. In my article on Jan. 21, I pointed out that shorting out-of-the-money (OTM) puts was a good play.
Shorting OTM Puts
I discussed selling short Feb. 21, 2025, puts (i.e., expiring today) at the $160 strike price. At the time, these puts had a midpoint premium of $1.68, providing a yield of 1.05% (i.e., $1.68/$160.00).
Today, those puts are almost worthless, since the stock is at $170.05, and we can likely expect they will expire that way. It makes sense to close those out or let them expire and then roll over the play to a new short-put expiration period.
For example, the March 21 expiry period shows that the $165.00 strike price has a juicy yield. At the midpoint, it is trading for $5.95, providing an immediate yield of 3.60% over the next month (i.e., $5.95/165.00).
This strike price is about 3.0% below today's trading price, and has a slightly high delta ratio of -.3465. This implies around a 35% chance that the stock could fall to this point over the next month.
Moreover, for more risk-averse investors, the $160 strike price, is $10 below today's price, or 5.88% out-of-the-money. The midpoint premium is $4.20, and the immediate yield to the short-seller is 2.625% (i.e., $4.20 / $160).
In addition, the delta ratio is much lower at about 27%, close to the same delta ratio in my previous article in my Jan. 21 article.
Keep in mind, however, that if ORCL stock falls after its results come out in two weeks, the short-put investor account may end up buying shares at the $160 or $165 strike price. As long as the investor still believes that ORCL is undervalued, as I suspect it is, this works out to a way to set a lower buy-in price.
For example, at the $160 strike price, the investor's breakeven price will be $160-$4.20, or $155.80. That is 8.35% lower than today. Moreover, if the investor can repeat this over 3 months they can collect more income and provide an even lower breakeven price.
The bottom line is that ORCL stock puts have high yields now in nearby expiry periods. That makes it an profitable way to potentially play this stock.
