Update – ADBE Earnings Trade Ideas

by CC March 17, 2017 1:42 pm • Trade Updates

Yesterday we previewed ADBE fQ1 earnings and detailed a couple of trade ideas, one a hedge and another a stock alternative. With the stock higher by almost 5% let’s check in on those ideas. First, the stock alternative. The idea behind this was to get upside in a stock already at highs but with defined risk in case of a retreat:


And what about those looking to buy some of these high-performing stocks but terrified of this entry? Defined risk is possible:

Stock Alternative/ Replacement

In Lieu of 100 shares of ADBE ($122.10), buy the April 120/130/140 call fly for 3.00
  • Buy 1 April 120 call for 4.70
  • Sell 2 April 130 calls at .90 (1.80 total)
  • Buy 1 April 140 call for .10

With the stock 128, this April call fly is worth about 5.50, a 2.50 profit mark to market and nearly a double. As far as trade management it depends on whether the event itself was the only thing you cared about, in that case it can simply be closed for a profit today. If keeping the bullish positioning was the plan it’s important to know how this trade makes even more money (or loses) from here. Right now the intrinsic value of the trade is 8 (if this trade expired today the 120 call would be $8 in the money, 130 and 140 strike expire worthless), that means there’s 2.50 in extrinsic value yet to be realized. and it still has the potential for up to $7 in total profits if the stock is at 130 on April expiration. But that’s a ways off at this point. So the best thing is patience, with a stop below of the current mark to market value breakeven. So 125.50 is a nice stop on the downside where profits will not be too different that they are now (assuming it doesn’t gap lower) and 130 is a nice target on the upside to take the trade off it it reaches there. If the stock goes sideways or higher from here, that’s ideal and the more patience the better as that extrinsic value yet to be realized decays as additional profits.

Now let’s check in on the hedge. The idea here was a low-cost hedge for long stock holders that locked in profits below 115. The ability to do that for next to no cost required the sale of an upside call. Here was the hedge:


vs 100 shares of ADBE ($122.10) Sell the April 130 call to buy the April 115/110 put spread for .15
  • Sell 1 April 130 call at .85
  • Buy 1 April 115 put for 1.10
  • Sell 1 April 100 put at .10

With the stock 128 this is worth about 1.35 or about a 1.50 loss vs the 5.90 in stock profits. The hedge did its job and allowed for disaster protection into the event. As far as trade management if the stock went lower from here, the hedge is no longer a realistic protection with the 115 put too far away, so that portion can be closed and some money saved. If the 130 strike seems too close for comfort, that can be bought to close and rolled to the 135 strike and left as a covered call. Or the 130 short call can be left as the covered call using 130 as a stop on the upside to close the short call. The ideal situation here is for the stock to continue higher but not be called away, the longer the short call can be left the less this hedge will have cost, and after closing the put spread, if the short call expires worthless, the hedge was free.