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Monday, 12/18/2023 2:07:08 PM

Monday, December 18, 2023 2:07:08 PM

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Oracle (ORCL) Bears Could Be Tempting a Gamma Squeeze
By: Barchart | December 18, 2023

One of the beautiful aspects of options trading is that if you know what to look for, you don’t necessarily need to participate in its often-complex tactics and strategies. Instead, you can simply buy the underlying security in the open market and ride out the implications of derivative market dynamics.

Case in point is cloud software giant Oracle (ORCL). After posting a strong performance so far this year, some market experts have argued that a downturn was simply inevitable. So far, that’s exactly what has happened. Recently, the company disclosed results for its fiscal second quarter, disappointing onlookers.

Despite a modest lift in revenue on a year-over-year basis, Oracle failed to meet Wall Street’s consensus estimate. Conspicuously, the company suffered a 17.9% YOY decline in sales from its cloud and on-premise licenses. In fairness, that red ink was counteracted by a 12% YOY lift in the cloud services and license support units.

Still, ORCL stock absorbed an approximate 10% loss in the trailing month, confirming that investors were looking for a bit extra, something that the enterprise simply could not deliver. Along with the mixed earnings disclosure, the Barchart Technical Opinion indicator rates ORCL stock a 24% sell with a weak short-term outlook.

Adding to the pensive nature of ORCL stock, analysts are perfectly split on the software stalwart. Among 24 experts, 12 rate ORCL a strong buy and the other half view it as a hold. Interestingly, the overall assessment is a slight improvement from the 10 strong buys and 14 holds from three months ago. However, analysts aren’t exactly clamoring for Oracle stock.

On the surface, the framework seems stuck at a stalemate at best and unpleasant at worst. Nevertheless, the technical indicator also warns that ORCL stock is approaching oversold territory and that investors should be watchful of a trend reversal.

That’s a non-zero probability. Here’s why.

ORCL Stock is Begging for a Reversal

Following the close of the Dec. 15 session, ORCL stock represented one of the highlights in Barchart’s screener for unusual stock options volume. Now, let me be blunt. This inclusion doesn’t really mean a whole lot. Otherwise, we’d all be rich just buying securities that show up on this or that radar.

But ORCL stock making it on the list on Friday does point to a possible bullish framework. First, total volume reached 278,777 contracts, representing a 189.73% increase in activity relative to its trailing one-month average volume metric. Within this tally, 221,010 contracts were call options, yielding a face-value bullish put/call volume ratio of 0.26.

To be sure, this figure doesn’t mean a whole lot by itself. However, in recent sessions, the options flow screener – which exclusively filters for big block transactions – shows heavy demand for sold calls. That’s not particularly surprising given the disappointing fiscal Q2 earnings report.

In a technical sense, then, market makers or institutional traders have become short gamma through their sold (written) calls. Essentially, gamma is the rate of change in an option’s delta and the underlying asset’s price. Regarding ORCL stock, if it declines, the gamma of the short call options becomes more negative. For the bears, that’s exactly the outcome they’re hoping for.

However, on Friday, ORCL stock decided to pop up 3%. Now, the gamma is suddenly becoming more positive, an unexpected outcome. And with many of the sold calls featuring a strike price of $104, the delta is becoming more sensitive to the volatility of ORCL in the open market.

Depending on the exposure and the overall liquidity situation, a gamma squeeze may soon materialize because the big players – who effectively are short ORCL stock – must now cover their bearish wagers. Should Oracle shares continue to rise higher, the pessimists may find themselves under greater pressure to cut their losses by buying the underlying security.

Of course, buying activity would likely lead to a feedback loop as other bearish positions get blown up, leading to a potentially significant spike in ORCL stock.

Why the Trade Might Work

One of the reasons why gamma squeezes fueled by heavy sold calls may be the most impactful centers on the risk of unlimited losses. When traders buy an option, they have the right but not the obligation to exercise the contract. On the flipside, traders selling an option have the obligation but not the right to fulfill the terms of the contract.

When it comes to sold calls, call writers (sellers) agree to see the underlying stock at the listed strike price. However, if the writer doesn’t own the security – meaning the sold calls are naked – the trader must buy the stock in the open market. If shares rise higher, the call writer must buy the security at the elevated price, only to sell it at the lower strike price.

Since a stock can theoretically rise indefinitely, the losses are undefined. Needless to say, it’s a harrowing situation.

Obviously, the potential for a gamma squeeze – even in cases involving heavy volume of sold calls – offers zero guarantees. Further, when the biggest and smartest institutions do anything, it’s usually for a well-thought-out reason. Still, stuff happens, which could work in your favor if you want to speculate on ORCL stock.

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