Adobe (ADBE) – Upgrade Available

by CC September 20, 2016 2:25 pm • Trade Ideas

Earlier, Dan previewed Adobe (ADBE) earnings, due after the close. Similar to the FedEx post I wanted to detail some trade ideas for those with either a long directional view into ADBE’s earnings, or for those already long the stock.

First, let’s recap how much the options market is implying for the stock to move on the release. Right now, options are pricing in about a $4 move. On the upside that makes sense as it’s the previous high in the stock at around $104, but below the most obvious level of support is a little outside that $4 at more like $93 for the 200 day moving average. So this risk/reward may be a little asymmetrical. And honestly, on a strong move higher it’s unclear just how much resistance that recent high would provide because that was a breakout. So for strike selection purposes it may make sense to exaggerate the implied move a little bit in order to create some space. Of course, the stock is right around 100 going in, and often times that round number can act as a bit of a magnet if the results are in line with expectations. So we have to keep that in mind as well.

So let’s first look at an interesting leverage/yield idea:  

Against 100 shares of ADBE ($100), Buy the October 105/110 1×2 ratio call spread for .50
  • Buy 1 Oct 105 call for 1.34
  • Sell 2 Oct 110 calls at .42 (.84 total)

Break-even on October expiration:

Gains of up to 4.50 above 105.50 with max gain of 4.50 at 110. Called away in the stock above 110 but at an effective price of 114.50.

Losses of up to .50 below 105.50 with total loss of .50 below 105

Rationale – This simple leverage trade acts like a supercharged over-write where it has the potential to add up to 4.50 in yield/leverage if the stock makes new highs over the next few weeks. Like an over-write, it identifies a spot where one would be willing to no longer be long the stock and take profits, but again, at an effective price that’s 14.5% above where the stock is currently trading, and in less than a month.

Next, let’s look at bullish stock alternative with defined risk:

In lieu of 100 shares of ADBE ($100), buy the Oct 100/110/120 call fly for 2.50
  • Buy 1 Oct 100 call for 3.30
  • Sell 2 Oct 110 calls at .42 (.84 total)
  • Buy 1 Oct 120 call for .04

Break-even on October expiration:

Gains of up to 7.50 above 102.50 to 117.50 with max gain of 7.50 at 110 on Oct exp.

Losses of up to 2.50 below 102.50 with total loss of 2.50 below 100.

Rationale – this trade defines risk to just 2.50 (below the implied move of $4, while establishing a fairly realistic range for profits on the upside with a break-even a few dollars above where the stock is trading. This trade does not do well if the stock goes down, obviously, but it defines risk in that event, the most that can be lost is 2.50. Also, a pin to 100 isn’t an ideal situation as it can lose 2.50 even though the stock is effectively in the same spot. But it won’t lose 100% on either of those scenarios on the event itself assuming it’s not down massively. So there is time for it to work out, even if it’s still 100 or below following the results.