New Trade – $ADBE: PhotoStop

by CC March 20, 2014 11:47 am • Commentary

Yesterday, we previewed (below) a trade structure we were looking at in ADBE.  

We wanted to play for the recent range in ADBE to continue and the recent high to act as resistance.  However, we waited yesterday until we could enter the structure at a better price. Today with the stock up, we’re going to put the trade on:

TRADE – ADBE (68.50) Buy to open the April 70/65/60 put fly for 1.53

– Buy 1 April 70 put 2.67

– Sell 2 April 65 puts at 0.66 each (1.32 total)

– Buy 1 April 60 put .0.18



ADBE reported its fiscal first quarter earnings last night:

The company on Tuesday reported first-quarter earnings of $47.05 million, or 9 cents a share on revenue of $1 billion. Adjusted earnings were 30 cents a share, a nickel better than estimates.

The main takeaway from Adobe is that it added 405,000 Creative Cloud subscriptions from a year ago and has annualized recurring revenue approaching $1 billion for its Creative business.

As for the outlook, Adobe projected second quarter revenue of $1 billion to $1.05 billion with non-GAAP earnings per share of 26 cents a share to 32 cents a share. Wall Street is looking for earnings of 26 cents a share.

The earnings leaked before the closing bell yesterday and the stock took a run at new highs but failed around the 70 level. This morning it got hit pretty hard. It’s bounced off its lows alongside ORCL stock getting bought from its lows this morning. The stock has been in a weird range for the last month and now with earnings out of the way, we want to make a defined bet on that range holding, but want to wait until we see a better price from a risk reward standpoint:

Hypothetical Trade  – ADBE (68.00) Buy to open the April 70/65/60 put fly

– Buy 1 April 70 put

– Sell 2 April 65 puts

– Buy 1 April 60 put

Currently this structure is about 1.80. We like it alot closer to 1.50, so we’re going to wait to see if the stock can rally a little more before we pull the trigger but wanted to share the thoughts before then.



ADBE reports earnings today after the close.  We last discussed ADBE on the site in a MorningWord post back in mid-December, after the stock’s fiscal Q4 earnings report. This is what we wrote:

Last night ADBE reported their fiscal fiscal Q4 earnings that beat estimates but lowered Q1 guidance for both earnings and sales.  Initially the stock sold off a couple bucks but quickly rallied back and now is up 5% after the company signed up more than expected users to their Creative Cloud platform.

As Enis succinctly laid out in his ADBE earnings preview the other day, the company is sacrificing profits in order to be able to survive as they quickly move away from the desktop licensing model to the Software as a Service model that had been eroding their competitive position by smaller upstarts.

As we’ve seen with AMZN, certain companies are able to push that promise continually further out, like a carrot that’s always just out of reach of the mule.  ADBE has started to behave in that manner, where optimistic psychology trumps any near-term fundamental concerns.  In the near term though, last night’s lowered fiscal Q1 & 2014 guidance is likely to result in a Q1 beat at least, which bulls will point to as a catalyst, despite the stock now being just a couple % from the prior all time highs.   In that case, technicals are going to be even more important, as the psychology surrounding the price action will often be more important than news about the company itself.

Since that gap up in December, ADBE held its December breakout and consolidated, and then pushed substantially higher in early February, to another new all-time high.  The stock is now up 14% year-to-date, and almost 75% over the last year.

ADBE’s chart since early 2011 is quite a sight to behold:

ADBE weekly chart, 20 week moving average in yellow, 50 week moving average in pink, Courtesy of Bloomberg
ADBE weekly chart, 20 week moving average in yellow, 50 week moving average in pink, Courtesy of Bloomberg

ADBE has more than tripled since its low in the fall of 2011, and the stock has really ripped since late 2012, when it broke out to a new high.  The weekly chart shows the consistency of the move higher, as ADBE has held its 20 week moving average for the past 18 months.  That’s quite a feat for a stock that has shown a good amount of upside volatility, but with little in the way of a downside correction in that period.  The stock is still more than 25% above its 50 week moving average ahead of today’s earnings release.

We’re curious to see whether the earnings reaction for ADBE holds true to form of the past year, where the details hardly matter, and the stock gaps up regardless.  No position ourselves, but an interesting situation to watch nonetheless.