Thursday, March 27, 2008

Good and bad news for Oracle

Oracle had a pretty good third quarter, but not good enough for Wall Street's standards. Earnings came in at 26¢, which was 6¢ better than the previous year, but 4¢ less than the average analyst prediction. I don't see anything too surprising about the numbers on first inspection—there aren't as many companies buying new licenses, but current customers still seem to be paying. But Oracle's shares fell $1.50 or so this morning.

Meanwhile, my short call position gained about 75¢ over the same time period, which effectively cushioned half of the loss for me. Further, the news does not substantially lower my long-term opinion of Oracle's value, though it did reduce the odds I'd get $21 for my shares. So selling the call option has served my purpose. Interestingly, the call ought to have served the purpose of whoever bought it as well. Rather than buying shares and losing $1.50 overnight, the buyer would have lost only 75¢. And the insurance would have required less cash be tied up than if the shares were bought outright. Altogether, it was a fair exchange.

With 22 days remaining before expiration, there the odds the option will be exercised are less than 30%

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