In last week's edition of Trading Tools, SunTrust Banks, Inc. (STI) was examined, as it appeared on the Zacks Most Active Options filter. Utilizing the same screener this week – in an effort to find stocks that call players are targeting – another equity caught my eye: software security Oracle Corporation (ORCL).
Before we begin, let's explain the contrarian stance that makes Schaeffer's so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.
However, keep in mind that some optimism and pessimism is genuinely warranted and isn't always a contrarian indicator – like an outperforming stock with many "buy" ratings or an underperforming stock with a plethora of "sell" ratings.
The Most Active Options Filter
The filter is somewhat self-explanatory. It looks for stocks with single-day option volume in excess of their average volume over the last month. Why is this important? Simply put, this filter allows us to read how options players feel about a certain stock. Furthermore, unusually heavy option activity can, sometimes, be the sign of an event (like earnings or merger-and-acquisition news, for instance) or occasionally a reversal of sentiment in the options pits.
A Change of Pace in the Options Pits?
As mentioned above, Oracle caught my attention due to the filter, which revealed that the equity's December 17 call was among the most popular options traded last Thursday. More specifically, this bullish bet saw almost 17,300 contracts change hands on all 6 exchanges.
However, after further research, it seems that the aforementioned call-buyers took the bullish road less traveled. Lately on the International Securities Exchange (ISE), options players have flocked more toward the bears' lair. This preference for pessimistic positions is demonstrated by ORCL's 10-day ISE put/call ratio of 1.55, which ranks in the 82nd annual percentile. In other words, options traders on the ISE have purchased ORCL puts at a faster pace than usual during the past couple of weeks.
Additional evidence of the growing bias for bearish bets is the stock's ascending Schaeffer's put/call open interest ratio (SOIR), which measures options with less than 3 months until expiration. Oracle's SOIR has muscled higher in recent months, and currently sits at 0.99. What's more, this reading ranks in the 95th annual percentile, implying that short-term options speculators are only 5 percentage points from an annual pessimistic peak.
So, is the skepticism surrounding the security warranted?
Technical Talk
To answer that question: it would seem that options players are justifiably leery of ORCL – from a technical standpoint at least. Since grazing the 24 level in early August 2008, the shares have receded more than 40%, pressured lower beneath double-barreled resistance from their 10-day and 30-day moving averages. Earlier this month, the security attempted to break out, but was quickly capped by its descending 50-day trendline.
From a longer-term perspective, it seems the shares of ORCL may be attempting to find some footing in the 16-to-17 region, which acted as support from late-2006 into early 2007. What's more, this neighborhood is home to the equity's 50-month moving average, which could help buoy the shares.
However, if the sultan of software attempts to rally, it could face a speedbump in the overhead 18-to-19 region for a couple of reasons. First, this area supported the security until just last month, and could reverse roles to play the part of resistance. Second, the 18 strike is home to peak call open interest of more than 45,000 contracts in the soon-to-expire November series of options; heavy accumulations of bullish bets can often act as an options-related roadblock as expiration nears.
Word on the Street
So, in light of the stock's recent struggles on the chart, are analysts - like near-term options traders - riding the bearish bandwagon?
According to data from Zacks - not in the least. In fact, despite the equity's year-to-date loss of about 22%, the majority of the brokerage bunch has high hopes for ORCL. More specifically, the security currently garners an impressive 14 "strong buys" and 2 "buy" ratings, compared to only 2 "holds" and no "sells."
The Bottom Line
Technically speaking, ORCL advocates should keep an eye on the 16-to-17 region as potential support. This area has bolstered the stock before, and is also home to its 50-month moving average – a trendline the security hasn't closed a month beneath since early 2005. On the flip side, investors should take heed to the 18-to-19 neighborhood as potential resistance. This region is not only home to peak call open interest in the front-month series of options, but also acted as a long-term foothold until just recently, and could reverse course and weigh on the equity.
More importantly, however, ORCL fans should note the sentiment surrounding the shares. While short-term options speculators are leery of the downtrending stock, the majority of the analyst community is not. A fresh round of downgrades and/or price-target cuts could further exacerbate the equity's year-to-date losses.
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