An Adobe Reader For Earnings and A Few Ways To Play For Those W/Conviction

by Dan June 20, 2011 9:01 pm • Commentary

Adobe reports their fiscal Q2 tonight after the close. The options market is implying about a 7% move vs the 8 qtr avg move post earnings of ~6.5%. 

-the stock is basically flat on the year after the almost 14% decline in the last months from what was a 52 week high.

-Options volume yesterday was almost 5 times the daily average as the July 32 and 30 Puts where active.

-As expected 30 day implied vol is elevated to about 44 vs the 60 day implied of 36 (which does not capture any earnings) and the 30 and 90 day realized vol of ~25.

-Wall Street analysts are fairly mixed on the name with 12 Buys, 13 Holds and only 1 Sell and an average 12 month price target of 37.89 according to Bloomberg.

-Sentiment in a name like this is important when you consider where the stock has been of late and what expectations are for earnings….below are a few of the headlines of the preview notes from analysts:

Citi: 2Q11 Earnings Preview: Set-up Positive; Reseller Survey
Suggests Stable, Though Not Accelerating Trends

Merrill Lynch: 2Q11 Preview: Expect good
F2Q results,   Expect good F2Q results; possible F11 guide up

Morgan Stanley: CS5.5 Cycle Should Support
Solid Q2 Results

Jeffries: No CS5.5 Boost . . . But Steady Could Be Fine

-Technically the stock is at an inflection point, in my opinion, and unlikely to stay where it is as the stock sits right above important support at 30, which dates back to 2008.

[caption id="attachment_2800" align="aligncenter" width="300" caption="2 Yr ADBE Chart Provided by Bloomberg"][/caption]


WHAT TO EXPECT:{##34##} When ADBE reported their Q1 in late March they noted that the disaster in Japan would hurt their outlook and guided down revs by $50 million and eps for the qtr went from .54 to a range of .56 to .47 .   Most analysts feel at this point that the company’s guidance might have been a little conservative and that there is a decent chance that they come in line with the original range.  If they do that and are able to guide Q3 flat to up the stock should rally and retrace a portion of the recent sell off.  I think it is fair to say that an in-line qtr is in the stock but a guide down for Q3 could be the catalyst to send the stock through the crucial 30 level.

MY VIEW: I am a little torn here, especially as I am looking to be more constructive and find opportunities on the long side…..ADBE is interesting to me because of the recent under-performance and the rate at which it happened.  The event is a tough one because who knows what the guidance will bring. I am fairly confident that the company will meet current quarter expectations, but the movement in the stock will come from the outlook.  I lay out both sides because I generally don’t like to play around events if I don’t have strong conviction.


1. If you are long and worried about downside volatility around the earnings event, consider July collars for little cost.

TRADE AGAINST A LONG: ADBE ($30.95) Buy the July 28 / 34 Collar for .03   (do this on a one up basis to your stock)

-Sell the July 34 call at .37 and use the proceeds to

-Buy the July 28 Put for .40

Break-Even on July Expiration:

Upside: stock is btwn 30.95 and 34 enjoy the profits of the stock.  Stock 34 or higher (up ~10%) and your stock is called away essentially at 34 (less the .03 premium you paid for the structure).

Downside: btwn 30.95 and and 28 you have the losses of the stock up to 2.98 (2.95 plus the cost of the structure) but you are protected below 28.



TRADE: ADBE ($30.95) BUY JULY 33 /35 Call Spread for .40

-Buy July 33 Call for .61 and

-Sell July 35 Call at .21

Break-Even on July Expiration:


stock btwn 33 and 33.40 lose up to .40,

stock btwn 33.40 and 35 make up to 1.60 or 4x your money if stock retraces move back towards recent highs, above 35 make full 1.60

Worst case stock below 33 and lose the full .40 or less than 1.5% of the underlying stock price.


3.  Low Conviction, Low Premium Way to Express Bearish Views to Long-time Support–You would do this if you think there is a good chance that the company guides their fiscal q3 down.

TRADE: ADBE ($30.95) Buy the July 29/27/25 Put Fly for .29

-Buy 1 July 29 Put for .66

-Sell 2 July 27 Puts at .46 (.23 each)

-Buy 1 July 25 Put for .09

Break-Even on July Expiration:

Worst Case: stock 29 or above 25 or below and lose .29 premium that you paid for the Put Fly

stock btwn 29 and 28.71 lose up to .29, stock btwn 28.71 and 27 make up 1o 1.71

Best Case: stock at 27 make full 1.71,

stock btwn 27 and 25 payout trails off….

TRADE RATIONALE: Even though I suggest that these are low probability trades I also like the structures, dependent on your market view, as you will have a lot of time to earn them out if nothing much happens, as I believe the market is at an inflection point too…..for instance if you think the market is trying to make a near term bottom and you also think that ADBE can beat and raise then the out of the money call spread could check a couple of boxes…..same goes for the Put Fly if you have a bearish market view and you believe any uncertainty in the guidance will send the stock down 10%.