Investors Grab Oracle Call Options Following Positive Earnings Report - TheStreet

On the heels if its fiscal fourth-quarter

earnings announcement, software maven


(ORCL) - Get Report

has become the

option of investors' affection.

Implied volatility in Oracle options has risen dramatically over the course of the past week, increasing to 85% from 66%. Implied volatility, which is derived from the option's most recently traded price, reflects how much a stock is expected to move over the life of the option.

After Monday's close, the company issued its quarterly results that beat Wall Street's consensus estimate by a penny. More importantly, however, the firm's CFO expressed confidence that business had already hit a bottom and conditions seem to be improving.

Ahead of earnings, some investors were betting on a positive outlook from the company as they purchased the near-the-money July 15

call options pretty aggressively. More than 20,000 call contracts traded on open interest of 42,904, with the premium, or cost of the option, going for $1.40 ($140 per 100). (Open interest refers to the number of outstanding contracts on a given option.)

According to one trader at the

Chicago Board Options Exchange

, customers were buying the calls outright for the most part, taking a shot that the stock would move upward in the next four weeks. Sure enough, the stock was up $1.69, or 11%, to $16.53 this morning, putting those call options

in-the-money, or above the

strike price. Excluding transaction fees, an investor who bought the July 15 calls Monday needed the stock to move above $16.40 to secure a profit. Today, the premium on those calls has jumped to as high as $2.45. The investor can either exercise his option and buy the stock at $15, or he can sell the calls to earn $1.05 ($105 per 100). So, for example, if you bought five contracts for $700, those options are now worth $1,225.

Investors tried to grab as many call options as possible right out of the gate this morning. The July 15 calls traded more than 35,000 contracts on open interest of 54,921. One floor trader said bluntly that investors were looking to get in on the action before a pop in the share price. The July 17 1/2 calls were even more active, with more than 41,000 contracts trading hands on open interest of 54,499. Because these calls are further away from the money, the premium is not as stiff, ringing in at 90 cents ($90 per 100).

Following the positive outlook, Oracle was

upgraded by

Merrill Lynch

and several other investment banks this morning. Despite all the warm fuzzies and bullish sentiment about the company on the Street today, Oracle does face obstacles.

SG Cowen

issued a note saying, "

Oracle is cautiously optimistic, but faces a tug of war between spending and new products." SG Cowen maintained its buy rating on the stock on "reasonable valuation."

Oracle ended the day up 12.9%, or $1.92, to $16.76.

A week ago

Goldman Sachs

analyst Rick Sherlund issued a research note that said he doesn't expect a recovery in the software industry any time soon. Sherlund mentioned


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as the only two software firms that will fare well under the current conditions.