AI trade faces test with next week's Oracle earnings

In this article ORCL The coming week could be pivotal for Oracle and the AI complex.

The day after OpenAI Foundation's presentation at the Goldman Sachs Communications & Technology conference, Oracle reports earnings amid enormous enthusiasm for its role in the AI infrastructure buildout precisely at a time when questions surrounding OpenAI's enormous infrastructure commitments, to Oracle particularly, are becoming increasingly important.

Wall Street is decidedly optimistic: 42 Buy ratings, eight Holds and just one Sell. Expectations call for roughly 28% constant-currency revenue growth, versus 11% a year ago, while adjusted EPS may rise closer to 18.5%. Revenues are growing faster than earnings.

Contrast that with some hardware suppliers, like Micron, whose revenues are expected to finish their fiscal year ending 8/31/26 246% higher, while EPS is expected to rise more than 840% over the same period. One is capitalizing on outsized demand and pricing power - the other is footing the bill. Cloud infrastructure remains the centerpiece of the bull case.

Oracle's OCI business has been growing explosively, and management is guiding to 27%-29% overall revenue growth this quarter. Amazon, Alphabet and Meta are already deploying essentially all (or slightly more) of the cash their businesses generate into AI infrastructure.

Oracle is different. Its existing balance sheet is already more leveraged, and it is relying more heavily on external financing as a percentage of anticipated spend.To the bulls, that's attractive because Oracle offers greater financial and operating leverage to an AI boom. But if you're not named Pollyanna, average it tends to clip one's wings just as predators approach, and Oracle's competitors are formidable.

The options market recognizes the uncertainty. Options imply a move greater than 10% by the end of next week, which is in line with the average over the last two years. So how to play it? Trade: With ORCL around the mid-$140s, consider the following structure.

Sometimes referred to as a "double diagonal", I more commonly refer to this as a strangle swap. In this structure, sell the September 25th weekly 125/167.50 strangle (simultaneously selling the 125 puts and 167.5 calls) while buying the January 115/195 strangle, for a net debit of roughly $8.30.

Based on current pricing, the position has an estimated probability of profit above 70%, with approximate expiration breakevens around $118 on the downside and $180 on the upside. Those levels represent moves of roughly 17%-18% in either direction. Those are big moves, because I think some big moves are possible.

The coming week could be pivotal for Oracle. The day after OpenAI Foundation's presentation at the Goldman Sachs Communications & Technology conference, Oracle reports earnings amid enormous enthusiasm for its role in the AI infrastructure buildout precisely at a time when questions surrounding OpenAI's enormous infrastructure commitments, to Oracle particularly, are becoming increasingly important.

Rather than paying heavily for that near-term volatility or betting outright against a stock with tremendous momentum, the September/January strangle swap sells the expensive earnings, betting the bulls and bears may duke it out for a few more months while retaining longer-dated protection against a genuinely outsized move.

If earnings are merely good, or merely bad, rather than transformational, rapid decay (aka "vol crush") in the September options should work in our favor. And if Oracle (or OpenAI) delivers a shock, negative or positive, the January wings give us something the naked premium seller doesn't have; more time. DISCLOSURES: Tidal holds positions in all the publicly traded securities mentioned.