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Options Update: An Iron Condor for Oracle Corp.

Options traders placing bets on a breather for Oracle

by Joseph Hargett (jhargett@sir-inc.com) 11/5/2009 1:30 PM

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The fact that the company's earnings report is now in the rearview mirror hasn't slowed Oracle Corp. (ORCL: sentiment, chart, options) options traders in the least. Overall, both put and call volume has more than doubled the stock's daily average, with traders centering on a quartet of front-month strikes. Specifically, ORCL was bombarded by heavy activity at its November 20 and 21 puts, with the November 22 and 23 calls also receiving considerable attention. More than 1,000 contracts traded on each of these strikes within roughly the first hour and a half of trading.

Drilling down on this activity, we find that today's volume is likely related to the entry of a larger spread position. In fact, a block of 250 contracts traded on each of the aforementioned four strikes at exactly 10:28 a.m. Eastern time on the International Securities Exchange (ISE), and were marked "spread" -- supporting the theory that this activity was initiated by the same trader.

Taking a closer look reveals that the November 20 puts and the November 23 calls traded at the ask prices of $0.09 and $0.05, respectively, while the November 21 puts and the November 22 calls changed hands at the bid prices of $0.27 and $0.23, respectively. Given this information, it would appear that we are looking at a potential iron condor on Oracle Corp.

The Anatomy of an Oracle Corp. Iron Condor

What is an iron condor? Basically, this options-trading strategy involves entering a bearish call credit spread and a bullish put credit spread. Much like a credit spread, the goal is for these options to expire worthless, allowing the trader to retain the entire credit received at the initiation of the position. As a result, the objective is for these options to close out of the money, requiring the security to remain in a narrow trading range. For more information on iron condors, click here.

In ORCL's case, the trade breaks down like this: The trader paid $2,250 for 250 November 20 puts, and shelled out $1,250 for 250 November 23 calls. Meanwhile, the trader received a credit of $6,750 by selling 250 November 21 puts, and pocketed another $5,750 by selling 250 November 22 calls.

So, we have a bearish call spread between the November 22 and 23 strikes, and a bullish put spread between the November 20 and 21 strikes. At this point, the trader has banked a total credit of $9,000. The breakdown for this iron condor is listed below:

Now, don't let this mass of calls and puts confuse you too much. The general principle of this ORCL iron condor is for the shares to close between the 21 and 22 levels by the time the options expire on Nov. 20. Such a close would allow all of the options involved to expire worthless, thus allowing the trader to retain the entire premium.

The iron condor has two breakeven points. The first breakeven point of 20.64 is found by subtracting the premium received ($0.36) from the sold November 21 put. The second breakeven point of 22.36 is arrived at by adding the premium received ($0.36) to the sold November 22 call.

The maximum gain is equal to the total premium received -- $9,000. The maximum loss, in the event of a downside move, is limited to the difference between the November 20 and 21 puts, minus the net credit received. In the event of an upside move, the maximum loss is limited to the difference between the November 23 and 22 calls, minus the net credit received. In this case, the maximum loss is the same following a sharp move in either direction, with the trader losing out on $0.64, or $64 per contract -- (21 - 20) - 0.36 = $0.64.

Below is a chart for a visual representation:

Implied Volatility

After the iron condor position has been established, increasing implied volatility becomes a considerable liability. The main concerns in this position are the sold November 21 put and the sold November 22 call. An increase in implieds for these options will increase their prices, making it much more expensive to exit the position should the trader need to buy these options back. Furthermore, since the whole point of an ORCL iron condor is for the stock to remain stable, rising implied volatility is also a negative as it suggests an increased possibility of a price swing for the shares.

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Options Update: Dell Inc. Short Strangled Ahead of Earnings

(11/19/2009 2:15:00 PM)

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Options Update: An Iron Condor for Oracle Corp.

Options traders placing bets on a breather for Oracle

by Joseph Hargett (jhargett@sir-inc.com) 11/5/2009 1:30 PM

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