Oracle Q2 FY26 Earnings Preview: AI Backlog Hype, Debt Jitters, and a Stretched Straddle

1. Market & Expectations

Oracle reports fiscal Q2 2026 results after the close on Wednesday, December 10, 2025. The quarter covers the three months through late November, the first full period after the jaw-dropping Q1 FY26 AI backlog announcement.

Street expectations are high but not euphoric:

Non-GAAP EPS: clustered around $1.64–$1.65.
Revenue: roughly $16.1–$16.2B, implying mid-teens year-over-year growth.
The focus is less on the headline beat/miss and more on:
- The trajectory of Oracle Cloud Infrastructure (OCI) growth after last quarter’s 55% surge.
- How quickly the enormous $455B+ remaining performance obligations (RPO) start translating into recognized revenue.
- Clarity on AI data center capex and funding in light of rising debt and credit-market scrutiny.

Price action into the print

Using the options snapshot as of Tuesday, December 9, around the U.S. close, Oracle trades near $222, versus a prior close near $221. Over different time frames:

Year-to-date: up roughly 34%, solidly outperforming the broad market.
1-year: up around 17%, but with violent swings.
1–3 months: the shares are down roughly 9–10%, giving back a good chunk of the September AI spike.
Over the past year, the stock has traded from the low-$120s to the low-$340s; $222 leaves it well below the highs but still far above the lows.

Realized volatility is elevated:

30-day realized vol: mid-40s% annualized.
90-day realized vol: around 70% annualized.

This is consistent with several double-digit daily moves this year, including the huge gap higher after the Q1 FY26 backlog surprise and subsequent sharp pullback as investors questioned how sustainable the AI trade really is.

Net: the stock enters Q2 with high expectations, a powerful AI narrative, but fresh skepticism around leverage, customer concentration, and the quality/timing of that backlog. The bar is not low.

2. Options & Implied Move

Event expiry and straddle-implied move

From the listed options around the earnings date:

The nearest expiry that fully captures the event is the Friday, December 12, 2025 weekly (about 3 days to expiration from the snapshot).
With the stock around $222, the near-the-money 222.5 call and put for that expiry price roughly:
- Call ≈ $11.5
- Put ≈ $11.9
- At-the-money straddle ≈ $23.4

That straddle implies a move of about 10.5% up or down by the end of the week.

External options watchers are reading similar numbers: most public write-ups describe traders pricing in a “nearly 10% swing” in either direction by week’s end, confirming that this straddle is at the high end of Oracle’s typical earnings moves.

Term structure and event premium

Comparing at-the-money implied volatility across expiries:

Dec 12 (event week): ATM IV ~146%
Dec 19: ATM IV ~91%
Jan 16 (monthly): ATM IV ~57%

So, the event week is trading at roughly 1.6–2.5× the volatility of the back months. The market is very clearly singling out this earnings print (and the AI/debt narrative) as the risk catalyst.

Against realized volatility:

30-day realized vol: mid-40s%.
90-day realized vol: around 70%.

The 10.5% implied move is rich versus typical mid-single-digit earnings reactions, but not crazy in the context of this year’s multi-day 30–40% spikes around AI headlines.

Skew, open interest, and positioning tells

On the Dec 12 expiry:

Total call open interest: ~126k contracts.
Total put open interest: ~75k contracts.
Put/call OI ratio: ~0.6 — calls dominate.

Strike-by-strike, the biggest clusters are:

Upside calls: heavy OI around $230, $250, and $260.
Downside puts: large OI between $175–$200.

Skew by implied vol:

10–20% OTM calls (above the current price) trade at average IV around 169%.
10–20% OTM puts trade nearer 155%.

So short-dated upside calls are more expensive than downside puts, even after adjusting for distance from the money.

Combined with modest short interest (roughly 1.5% of float, ~1 day to cover) and a cheap borrow, the options board looks more like:

Bullish or at least upside-curious positioning, with traders paying up for out-of-the-money calls, rather than a market that is aggressively hedged for disaster.

The options tape is thus telling a story of:

Big event risk (10%+ move priced),
Front-loaded volatility, and
A meaningful tilt toward upside speculation.

3. Fundamentals, Positioning & Sentiment Cross-Check

Growth, backlog, and AI narrative

Q1 FY26 (reported in September) set the stage:

Total revenue: ~$14.9B, up 12% year over year.
Cloud revenue: ~$7.2B, up 28%.
Cloud infrastructure (OCI): ~$3.3B, up ~55%.
Non-GAAP EPS: up mid-single-digits YoY.

The headline shock was the RPO (remaining performance obligations) number:

RPO jumped 359% YoY to ~$455B, driven by four multi-billion-dollar contracts with three customers, including a massive, highly publicized AI data center deal with OpenAI.
Management has talked about RPO heading above $500B in the near term and outlined an aggressive multiyear OCI revenue trajectory.

For Q2 FY26, consensus expects:

Revenue growth to accelerate into the mid-teens percentage range.
Non-GAAP EPS to step up from Q1’s $1.47 to about $1.64–$1.65.
Continued rapid OCI growth and evidence that the huge backlog is starting to convert into revenue in a predictable way.

Crucially, deeper analysis of the RPO and various commentaries suggests:

Only a small slice (roughly 10%) of that RPO is expected to convert within the next 12 months.
A very large portion of the backlog — especially the OpenAI-linked data center commitments — is back-loaded into 2027 and beyond and comes with questions about counterparty capacity and ultimate utilization.

So while the backlog is a powerful long-term narrative and supports the AI hyperscaler story, its near-term earnings power is more ambiguous than the headline number suggests.

Balance sheet, capex, and credit risk

Fundamentally, Oracle is now a high-growth, high-leverage AI infrastructure story:

Trailing P/E: roughly 51×.
Price-to-sales: about 10.7×.
Price-to-book: around 26–27×.
Return on equity: extremely high (near 70%), boosted by leverage.
Debt-to-equity: about 4.0×.
Current ratio and quick ratio both below 1, reflecting a balance sheet engineered for capital intensity rather than conservative liquidity.

Analysts and credit markets have been increasingly focused on:

How Oracle finances a multi-hundred-billion-dollar AI data center build-out while keeping an investment-grade rating.
Rising interest expense and the sensitivity of earnings to funding costs.
The concentration risk around OpenAI and a handful of mega-contracts.

Credit default swaps on Oracle have widened, and multiple pieces from Reuters, FT and others frame this quarter as a test of the AI/debt trade: can management convince investors that the economics of this backlog justify the leverage?

Valuation and comp set

Against large-cap software and cloud peers:

Oracle’s ~51× trailing earnings and double-digit sales multiple put it toward the expensive end of the mature software universe, even if you grant a premium for AI and hyperscale growth.
Forward multiples compress somewhat (given expected growth), but the name still carries a rich, “AI premium” profile, especially for a company with a long legacy software base and heavy capex demands.

Peers with strong AI businesses (e.g., the largest cloud platforms) typically enjoy:

Larger, more diversified revenue bases.
Stronger balance sheets and lower leverage.
Comparable or lower earnings multiples despite arguably higher quality and scale.

Oracle’s bull case is that OCI’s growth curve and multicloud positioning justify those premiums; the bear case is that the risk profile is meaningfully higher than those peers for similar or higher valuations.

Price action, flows, and sentiment

Price action tells a “boom-bust-reset” story:

Q1 FY26 AI euphoria produced a 30–40% intraday spike, briefly pushing Oracle toward the $340s.
Since then, the stock has round-tripped a good portion of those gains, falling more than a third from the highs before stabilizing around the low-$200s.
Near-term (1–3 months), returns are negative high-single digits despite the strong YTD gain, signaling a cooling AI narrative and real position cleanup.

On positioning and sentiment:

Short interest is low (around 1.4–1.5% of float) with a short-ratio around 1 day. There is no evidence of a crowded short.
Sell-side sentiment remains tilted bullish, with a majority of “buy” ratings and average price targets implying 40%+ upside from current levels.
Recent notes and news coverage highlight a bull–bear tug-of-war:
- Bulls emphasize explosive OCI growth, the unprecedented RPO backlog and Oracle’s multicloud partnerships.
- Bears focus on debt, capex, OpenAI concentration, RPO quality, and the risk of an AI bubble.

Social and retail chatter is active but not meme-like. Oracle shows up in AI-themed threads as a “test case” for how far the AI infrastructure trade can stretch before investors demand more discipline.

Putting it together:

Fundamentals and backlog are undeniably strong.
Valuation, leverage and RPO quality optics are demanding.
Positioning and options skew lean bullish, not defensively hedged.

4. Guidance, Direction & Confidence

Scenario map

Starting from a 10.5% implied move and the backdrop above, here is a simplified scenario grid for the opening reaction (gap from pre-earnings close):

Base case – “Solid numbers, uneasy message” (≈60% probability)
- Revenue and non-GAAP EPS land roughly in line with consensus, perhaps with a slight top-line beat.
- OCI growth remains strong but does not markedly accelerate versus Q1 in a way that changes the long-term narrative.
- Management leans into the $455B+ backlog, but Q&A focuses heavily on:
  - Funding plans for AI data centers.
  - Maintaining investment-grade credit.
  - The timing and quality of RPO conversion (how much is really locked in, how dependent on OpenAI).
- Tone is reassuring but not explosive; the story looks “as expected” with more nuance on risk than bulls would like.
- Market reaction: “sell the news” from a rich base with bullish positioning.
- Expected gap: roughly –7% to –10% (stock in the $200–$210 area).
Bull case – “AI flywheel re-ignites” (≈25% probability)
- Revenue and EPS cleanly beat consensus.
- OCI growth accelerates and management gives more granular color on diversified demand beyond OpenAI.
- Capex and leverage commentary is better than feared:
  - Clearer path to funding without over-levering.
  - Indications that capex intensity can peak and normalize over the next few years.
- RPO and bookings metrics reinforce the idea that Q1 wasn’t a one-off.
- With upside call buyers already loaded, the stock gaps higher and squeezes as shorts and underweight longs chase.
- Expected gap: roughly +8% to +12% (stock in the $240–$250+ zone).
Low-vol case – “Noisy but forgettable” (≈15% probability)
- Small miss/beat on the quarter.
- Guidance and commentary are foggy but not alarming; investors decide to wait for future quarters to assess AI returns and debt.
- The options market proves too expensive; realized move is within ±5% and vol sellers win.
- Expected gap: roughly –3% to +3%.

Directional call

Given:

Rich valuation and leverage versus peers.
High bar on AI expectations after a spectacular Q1.
Bullish skew in short-dated options and relatively low short interest.
Macro and AI-bubble worries creeping into both news and social conversations.

The risk/reward around this particular print looks skewed to the downside:

The company likely needs to both:
- Deliver strong headline numbers, and
- Provide very convincing, detailed answers on capex, financing, RPO quality, and OpenAI concentration
…to justify the current multiple and a 10%+ upside reaction.

That is a tough bar, especially when options are already pricing in a big move and bullish trades are crowded in upside calls. In the base case, merely “good” results can still lead to multiple compression.

My call: Oracle is more likely than not to gap down on the open, with a realized move somewhat smaller than the 10.5% implied, centered around an 8% downside gap.

On a 0–1 scale for directional conviction, that corresponds to roughly:

Directional confidence (down vs up): ~0.6

Factor weight breakdown (for post-mortem audit)

Approximate weights assigned to each driver in forming this view (sum ≈ 1.0):

Options pricing, term structure, skew & positioning: 0.30
Fundamental growth, backlog, margins & RPO quality: 0.25
Valuation and balance sheet / leverage profile: 0.20
Price action, technicals, sector & macro backdrop: 0.15
Sentiment (sell-side, credit, social/retail): 0.10

If the post-earnings move diverges meaningfully from this call, these are the buckets to revisit first.

5. Trade Framework (examples, not advice)

For traders thinking about how to express a view around this setup, here are non-advice, risk-defined structures that line up with the analysis above. Exact strikes and sizing should be tuned to personal risk tolerance, execution quality, and updated pricing.

5.1 Bearish direction, moderately short vol

Structure idea: A short-dated put spread on the event expiry (e.g., buying a near-the-money put and selling a further OTM put).
Rationale:
- Expresses the view that Oracle gaps lower, but
- Recognizes that the 10.5% implied move is quite large, so you build in some premium collection by selling a lower strike.
Risk is clearly capped at the spread width minus net premium; reward is best if the stock finishes near or just below the lower strike.

5.2 Directional bearish, “sell the rip” via calls

Structure idea: A bearish call credit spread (selling an OTM call above the current price and buying a further OTM call as protection).
Pick strikes in the zone where:
- The stock would likely be trading only in the bull scenario (e.g., a region that would require a 10%+ upside gap).
Rationale:
- Benefits if Oracle fails to deliver the upside surprise implied by crowded call positioning.
- Still risk-defined if the bull case plays out and the stock rips through the short strike.

5.3 Vol-short but direction-agnostic with tails protected

Structure idea: A tight iron condor or broken-wing condor centered around the current price on the event expiry:
- Sell a call and a put near the money.
- Buy further OTM wings on both sides to cap risk.
This aligns with the view that:
- The 10.5% implied move is rich relative to typical realized earnings gaps,
- But there is genuine tail risk on both sides (massive AI upside scenario vs debt/RPO scare) that you want to hedge via wings, rather than running a naked short straddle.

In all cases, traders should remain conscious of:

Fill quality and bid/ask spreads in very short-dated weeklies.
Potential post-earnings volatility crush, even if the move is large.
Event-path risk: there can be sizeable moves between now and the print, especially given macro headlines and AI-related news flow.

6. TL;DR

Oracle reports Q2 FY26 after Wednesday’s close with the market focused on:
- Converting a $455B+ AI backlog into real revenue and cash flow.
- Managing a debt-heavy, capex-intensive AI data center build-out.
- Maintaining growth and margins while answering tough questions about OpenAI concentration and AI-bubble risk.
The stock around $222 is:
- Up strongly YTD and over the past year,
- But down high-single digits over 1–3 months after a huge AI-driven spike and retrace,
- Trading on rich multiples with elevated realized volatility.
Options on the Dec 12 weekly expiry price in about a 10.5% move, with:
- Front-loaded implied volatility far above back months.
- Call-heavy open interest and upside-skewed IV, suggesting bullish or upside-curious positioning.
Base case: Solid headline results and ongoing AI momentum, but not enough new information on capex, leverage and RPO quality to justify the current premium and the rich straddle. That setup favors a “sell the news” downside gap.
Directional call:
- Oracle is more likely to gap down than up on the open, with an expected move of roughly –8%, smaller in magnitude than the ~10.5% move implied by options.
- Directional confidence: about 0.6 (modest edge, not a slam dunk).
Trade implementations for sophisticated traders include:
- Bearish put spreads for defined-risk downside exposure.
- Call credit spreads targeting crowded upside strikes.
- Iron condors with wings to systematically sell rich event vol while capping tails.

Earnings Prediction