Yesterday we previewed Adobe’s (ADBE) fiscal Q2 results due out after the close today (below), and concluded:
into the print I would expect it would take a meaningful beat and raise for the stock to breakout to the tune of $4 to the upside, while I suspect it would be far easier for the stock to achieve that move to the downside if the company would missed modestly reduced guidance from March. We will take a closer look tomorrow prior to the close, and are considering trades that fade the implied move, with a slight downside lean.
Today the stock is pressing up against prior technical resistance with 2 hours to the print, and we find the set up interesting for a short premium trade.
The risk reward of this trade makes a lot of sense,. We’re able to fade the move while risking the same amount as the potential that can be made if the stock undeperforms its implied move. As we’ve said though, it’s binary in risk and as always the issue with short premium trades into events as one offs is they are based on the math over time. In other words, short premium strategies only work in bulk. You have to do them consistently in order to see the profits. And this trade is part of that continuing strategy found here.
Trade: ADBE ($80.35) Sell the June 77.50/75 – 82.50/85 Iron Condor at 1.25
Sell to Open the June 77.50 / 75 put spread at .55
-Sell to open 1 June 77.50 put at 1.06
-Buy to open 1 June 75 put for .51
Sell to Open the June 82.50 / 85 call spread at .70
-Sell to open 1 June 82.50 call at 1.28
-Buy to open 1 June 85 call for .58
Break-Even on June expiration:
Profits: max gain of 1.25 if stock is between 77.50 and 82.50, profits of up to 1.25 between 82.50 and 83.75 & between 77.50 and 76.25.
Losses: losses of up to 1.25 above 83.75 and below 76.25, but the loss, just like the gain is capped and max loss of 1.25 occurs below 75 and above 85.
Rationale: We’re risking 1.25 to make 1.25 with breakevens near the implied move. Since it’s a condor expiring on Friday we’ll know fairly quickly whether the trade will be a winner or a loser. The levels of total loss (75 and 85) are certainly in play on the event but that would be outperforming the implied move.
Original Post June 15th, 2015: Name That Trade – $ADBE: That Looks Shopped
Event: Adobe (ADBE) reports fiscal Q2 results tomorrow after the close. The options market is implying about a 5% one day move which is shy of the 4 & 8 qtr avg one day moves of about 6%.
Price Action / Technicals: Shares of ADBE have outperformed the Nasdaq Composite, by a few % ytd, 9% vs 6% respectively. Since making new 52 and all time highs in late February, the stock has failed at those highs on numerous occasions, with $80 serving as fairly staunch technical resistance, while the stock has held the uptrend that has been in place from the October lows, almost 35% lower:[caption id="attachment_54465" align="aligncenter" width="600"] ADBE 1yr chart from Bloomberg[/caption]
Another way to look at this chart would be the fairly staunch technical support the stock has between $75 and $70, which was the breakout level a year ago:[caption id="attachment_54466" align="aligncenter" width="600"] ADBE 2yr chart from Bloomberg[/caption]
Valuation: ADBE trading at 38x expected 2015 eps of about 2.10, and 8x expected sales of a tad less than $5 billion is far from cheap for a software company with a $40 billion market cap. The shares fairly adequately capture a bit of the enthusiasm associated with their ability to rapidly grow subscribers for their Creative Cloud suite.
Expectations: In mid March, ADBE did hit their guidance for Q1 but guided down current quarter with revenue expected to be in the range of$1.13 billion to $1.18 billion, and EPS in a range of 41 cents to 47 cents which is shy of consensus estimates of $1.18 billion and 48 cents. The stock declined 3.5% the next day.
In mid January the company announced a bump to their share-back program (here) to the sum of $2 billion by the end of 2017, so not expecting surprises on the capital return front.
Volatility Snapshot: The spread between 30 day at the money implied volatility (white below, how much the stock has moved) and 30 day at the money implied vol (blue below, the price of options) has reached the widest gap in nearly a year. This is a function of the stock’s consolidation near the highs, with growing skepticism from options traders, or those seeking near term protection:[caption id="attachment_54470" align="aligncenter" width="600"] ADBE 1yr chart of 30 day at the money IV vs realized from Bloomberg[/caption]
My View: into the print I would expect it would take a meaningful beat and raise for the stock to breakout to the tune of $4 to the upside, while I suspect it would be far easier for the stock to achieve that move to the downside if the company would missed modestly reduced guidance from March. We will take a closer look tomorrow prior to the close, and are considering trades that fade the implied move, with a slight downside lean.