Oracle Stock, Lennar Surge Off Lows With Earnings Due Soon; Darden Restaurants Sets Up Ahead Of Results

Oracle (ORCL) is set to report earnings in the coming week, along with a handful of other firms, as stock market bulls hold out hope for a Santa Claus rally. Since late September, Oracle stock has rallied about 31%, trouncing a gain of around 3% for the Nasdaq composite.

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Stock market conditions remain volatile ahead of an expected 50-basis-point hike by the Federal Reserve on Wednesday. It’s an environment where many bullish technical setups haven’t worked very well as institutional investors generally sit on the sidelines. What looks like strength one day is followed up by weakness the next.

Oracle Stock Shows Strength

Oracle has pulled back close to its 21-day exponential moving average with a relative strength line near highs.

When the software giant reported earnings in September, investors initially responded positively to the report. Oracle stock jumped 3%, but by the end of the day reversed lower with the broad market.

Oracle shares lost just over 1% on Sept. 13 after reporting earnings, but Oracle stock held up much better than the Nasdaq composite, which marked a distribution day, slumping 5.1% in higher volume.

Oracle reported an 18% increase in revenue, helped by its $28 billion acquisition of electronic health records company Cerner, which closed in June. Oracle’s cloud services and license-support segment  contributed $8.42 billion in revenue, up 14%. The segment made up nearly 75% of total revenue in the quarter.

In October, Oracle expanded its alliance with Nvidia (NVDA), announcing a multi-year partnership to help customers address business challenges with accelerated computing and artificial intelligence.

Results from Oracle are due Monday after the close. The Zacks consensus estimate is for adjusted profit of $1.17 a share, down 3% from the year-ago period. Revenue is expected to increase 16% to $12.04 billion.

Earnings Watch: Lennar, DRI, NDSN

Besides Oracle stock, several other firms have been showing relative strength ahead of upcoming earnings reports, including homebuilder Lennar (LEN), Darden Restaurants (DRI) and Nordson (NDSN). Lennar and Nordson report Wednesday after the close. Darden reports early Friday.

Homebuilders have been rallying amid falling interest rates. On the heels of a strong earnings report from high-end builder Toll Brothers (TOL) Tuesday, Lennar is expected to report adjusted profit of $4.92 a share, up 13% from the year-ago period. Revenue is seen climbing 21.5% to $10.24 billion.

LEN stock is sitting near a 90.10 entry in a bottoming base.

Darden Restaurants — the parent company of Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen and Yard House — is forming a big cup-with-handle base with a 149.90 entry.

Nordson, which makes dispensing equipment for consumer and industrial adhesives, sealants and coatings, is thinly traded. Its average daily volume is just over 200,000 shares. But it’s a high-priced stock, making it an institutional-quality name with an average daily dollar volume just north of $50 million.

Nordson is holding above short-term moving averages as it sits just below a 242.53 handle entry.

Meanwhile, electronics contract manufacturers have been on fire, including Jabil (JBL). The stock continues to hold near highs after reclaiming a 65.98 entry on Nov. 11.

Early Thursday, Jabil is expected to report adjusted profit of $2.21 a share, up 15% year over year, with revenue up 8% to $9.28 billion.

Jabil’s industry group was featured in an Industry Snapshot last month.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a recent Oracle stock option trade looked like.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week moving average for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

Oracle stock could be a candidate for a call-option trade as it retests a prior buy area near 80.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Oracle Stock Option Trade

Here’s what a recent call option trade looked like for Oracle.

When Oracle stock traded around 80, an in-the-money weekly call option with an 80 strike price (Dec. 30 expiration) came with a premium of around $3.50 a share per contract, or 4.4% of the underlying stock price at the time. It was a reasonably priced trade considering it was an in-the-money option and the expiration date was still a ways out.

One contract gave the holder the right to buy 100 shares of Oracle stock at 80 a share. The most that could be lost was $350 — the amount paid for the 100-share contract.

When taking the premium paid into account, Oracle would have to rally past 83.50 for the trade to start making money (80 strike price plus $3.50 premium per contract).

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight

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