EOT Trade Alert – January 28, 2009

| January 28, 2009

January 28, 2009

Trade Alert:

    Buy ORCL June 2009 $19 CALLS at $1.75 or better (ORQFT)

Company Background:

Oracle (ORCL) is an enterprise software company.  That means they make software for use in big corporate environments.  Their database and application software is used around the world.  The company has more than 80,000 employees worldwide.

Short-Term Catalyst:

Ever watch horror movies?  I happen to hate them, but a few friends of mine live for the experience.  The suspense, the racing heart, the sweaty palms.  It all adds up to the excitement.  I never really understood the attraction…

Then one day a friend explained it to me.

The movies aren’t so scary (especially the classics from years back).  But people who watch them get so worked up they end up scaring themselves even more.  They flinch at every shadow and random noise.

This is kind of the situation we’re in now with the stock market.

I’m looking at the trends in the market.  I’m seeing the technology group start to outperform the overall industry.  The indicator’s small but noticeable.  Then I look out at the analyst estimates for the industry and I see nothing but death and despair.

Just like the horror movie lovers, the analysts are scaring themselves.  The fear I’m thinking is a bit overdone… and here’s why.

When analysts get scared the first thing they do is re-jigger their financial models.  If sales were down 5% last quarter than they’re bound to fall 10% this quarter.  If you had a record loss last quarter, than the next quarter should be an even bigger loss…

It leads to overly pessimistic estimates… and a perfect way for us to make money.

See when a company beats their estimates, it’s likely the stock will rally.  Right now estimates and expectations are so low it’s hard not to beat estimates.  Just look at the track record:  In the last few weeks Sybase, SAP, Sun Microsystems, and even Yahoo beat estimates.

Notice I didn’t say they were profitable or growing… they beat estimates.  Because they beat estimates their stocks moved higher.

I see the same thing happening with Oracle.

As you know Oracle is a huge technology company focusing on software.  They compete with and/or work with many of those same companies beating estimates.  A good sign that Oracle will beat estimates too.

Now, the next earnings announcement for the company should be around the late March time frame.  I’m expecting the stock to move higher in anticipation of the company announcing passable quarterly results.  We should get a position established now to take advantage of the run-up.

On a technical basis, it looks like the stock put in a triple bottom in late November and early December.  It looks as the 50-day moving average has started to stabilize and may turn up at any moment.  We’re looking at higher highs and higher lows starting to be established.  The stock has also started trading above the 50-day moving average. This is a perfect situation for a trend higher.

Trade Details:

Option Ticker Symbol: ORQFT
Underlying Stock Symbol: ORCL
Current Bid-Ask Price: $1.35 – $1.50
Option “Buy Up To” Price: $1.75
Break-Even On Stock At Expiration: $20.75
Maximum Risk Per Contract: $175

Exit Strategy:

ORCL is trading at $17.71 per share.  Resistance levels will be at $18.50 and again at $20.50.  Support levels will be at $16.50 and $15.50.  Conservative investors should look to exit at the first support or resistance level.  Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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