For today’s Trade of the Day, we will be looking at a monthly chart for Oracle Corp. (ORCL), states Chuck Hughes of TradeWinsDaily.
Before breaking down ORCL’s monthly chart let’s first review what products and services the company offers. Oracle Corporation offers products and services that address enterprise information technology environments worldwide. Its Oracle cloud software as a service offering include various cloud software applications, including Oracle Fusion cloud enterprise resource planning, Oracle Fusion cloud enterprise performance management, Oracle Fusion cloud supply chain, and manufacturing management, Oracle Fusion cloud human capital management, Oracle Advertising, and NetSuite applications suite, as well as Oracle Fusion Sales, Service, and Marketing.
Now, let’s begin to break down the monthly chart for ORCL stock. Below is a 10-month simple moving average chart for Oracle Corp.
Sell ORCL Stock
As the chart shows, in January, the ORCL one-month price, crossed below the 10-month simple moving average (SMA). This crossover indicated the selling pressure for ORCL stock exceeded the buying pressure. For this kind of crossover to occur, a stock has to be in a strong bearish downtrend.
Now, as you can see, the one-month price is still below the 10-month SMA. That means the bearish trend is still in play! As long as the one-month price remains below the 10-Month SMA, the stock is more likely to keep trading at new lows and bearish positions should be initiated. Our initial price target for ORCL is 59.45 per share.
88% Profit Potential for ORCL Option
Now, since ORCL’s 1-month price is trading below the 10-month SMA this means the stock’s bearish decline will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an ORCL put option purchase.
The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat ORCL price to a 12.5% decrease.
The Optioneering Team uses the 1% rule to select an option strike price with a higher percentage of winning trades. In the following ORCL option example, we used the 1% rule to select the ORCL option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.
Trade with Higher Accuracy
When you use the 1% rule to select an ORCL in-the-money option strike price, ORCL stock only has to decrease 1% for the option to break even and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if ORCL stock is flat at 62.57 at option expiration, it will only result in a 4.7% loss for the ORCL option compared to a 100% loss for an at-the-money or out-of-the-money put option.
Using the 1% rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money put options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks. The prices and returns represented below were calculated based on the current stock and option pricing for ORCL on 10/10/2022 before commissions.
When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying stock continues to decline in price. For this specific put option, the calculator analysis below reveals if ORCL stock decreases 5.0% at option expiration to 59.44 (circled), the put option would make 41.6% before commission. If ORCL stock decreases 10.0% at option expiration to 56.31 (circled), the put option would make 88.0% before commission and greatly outperform the stock’s return. The leverage provided by put options allows you to maximize potential returns on bearish stocks.
