Option traders hope Oracle's results will lift shares

The headquarters of Oracle Corporation are shown in Redwood City, California February 2, 2010. Picture taken February 2, 2010.

CHICAGO (Reuters) - Investors expecting strong earnings from Oracle Corp (ORCL.O) have come out winners six times in a row, and speculators are betting on lucky number seven.

The world's No. 1 database software maker posts quarterly results after trading closes on Thursday. It has exceeded Wall Street's average sales and earnings estimates for the last six quarters and some investors expect more of the same.

"It appears people are willing to pay for calls on the expectation that Oracle will not disappoint post-earnings," said Jared Woodard, principal of Condor Options, a research and trading firm in New York.

Oracle's July $31 at-the-money options, those with strike prices nearest the stock's current price of $31.80, were the busiest ahead of the earnings report.

"These bullish options have seen more than 21,000 contracts crossed the tape. And with more than 70 percent of the trading taking place mid-market or on the offers, it looks like investors are positioning themselves for a 'pop' in the stock following the release," said Patrick Mortimer, director of options trading at Pipeline Trading Systems.

With an average price of $1.41, these contracts will need Oracle to trade above $32.41 over the next three weeks before any profits will be seen, Mortimer said.

"The company has beaten earnings estimates the last four quarters by an average of 11.85 percent," Mortimer said. "Today's option buyers will be looking for that streak to continue, along with a favorable forecast for the coming quarters."

Oracle's option volume was more than double the average daily volume, with about 69,000 calls and 22,000 puts traded by late afternoon on Thursday, according to options analytics firm Trade Alert.

SOME CAUTION PREVAILS

But with optimism riding high in the options market, it could set the bar for a negative reaction if earnings are not impressive.

Oracle shares have struggled in the last month as the market has declined. But their 12 percent fall has come after the stock hit a level not seen since October 2000.

"We have seen some speculative call activity, particularly in the at-the-money and out-of-the-money July $31 to $34 strikes. That being said, people are cautious on Oracle's earnings and earnings forecasts for the rest of the year," said TD Ameritrade chief derivatives strategist J.J. Kinahan.

Traders have been purchasing Oracle calls, granting them the right to buy the stock at a fixed price up to a certain date, at a greater pace than its puts -- or rights to sell the stock at a preset price.

Over the past 10 trading days, investors have bought nearly nine calls for every put as a fresh position on three U.S. options exchanges, according to options research firm Schaeffer's Investment Research, in Cincinnati.

That ratio checks in higher than 94 percent of the readings over the past year, Schaeffer's data shows.

"If Oracle disappoints when they report earnings, this could lead to selling pressure," said Ryan Detrick, senior technical analyst at Schaeffer's.

For Oracle's fiscal fourth quarter, ended May 31, analysts are expecting earnings of 71 cents per share, up from 60 cents a year ago, according to Thomson Reuters I/B/E/S.

(Reporting by Doris Frankel; Editing by Dan Grebler)