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Oracle's Going Down: How to Trade Earnings

Feel free to review more earnings releases, and you will notice the pattern of strength followed by weakness through 2012. Again, we don't predict the future, we predict the odds. With that in mind, if Oracle beats the estimates, as I expect they will, we should see the stock gap higher, followed by weakness in the days proceeding, as I mentioned earlier.

To take advantage of the relatively high option premium in front of earnings with a bullish bias, we can sell a bull credit spread. A bull credit spread uses two put options, with the higher strike price sold, and the lower strike price bought as a hedge.

We are able to control our risk to the amount between the two strike prices, while at the same time put the odds in our favor as a result of premium decay.

A bullish credit spread I like is the March 22 weekly expiration $36 & $34 strike prices. This includes selling the $36 strike put for about 57 cents and hedging with a $34 strike for about 13 cents. The net result is a credit of 44 cents per contract. The downside risk is $1.56 ($2 difference between strikes, less the premium received).

If you want to learn more about options and the math used to calculate what your ideal strategy should include, pick up a copy of "Options Math for Traders by Scott Nations," published by Wiley Trading. It's a must read for anyone who is serious about learning the fine details of selecting the correct options strategy based on your objectives.

After the earnings release, look to close out the position not long before noon. As an active options trader, it's my experience that the best time to sell options is near the open and close of trading, and on average, the best time to buy is during the lulls of midday.

Taking Oracle one step further for investors, you may want to consider buying protective puts outright after the earnings release with an expectation of selling two or three days later. Once the dust settles, and if nothing changes, expect Oracle's stock to continue the upward path throughout 2013.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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