A Short-Term Option Strategy for Adobe’s Muddy Forecast

by Joseph Hargett | June 20, 2012 9:12 am

A Short-Term Option Strategy for Adobe’s Muddy Forecast

Shares of Adobe Systems (NASDAQ:ADBE[1]) could be in trouble today, as investors react negatively to the company’s weaker-than-expected forecasts for earnings and revenue. Specifically, the business software specialist said it sees third-quarter revenue in the range of $1.075 billion to $1.125 billion, on adjusted earnings of 56 cents to 61 cents per share.

Analysts had forecast third-quarter earnings of 61 cents per share on revenue of $1.134 billion.

For the full year, Adobe narrowed its earnings outlook to a range of $2.40 to $2.46 per share from its prior range of $2.38 to $2.48. The company also revised its fiscal 2012 revenue growth target to a range of 6% to 7% from a previous range of 6% to 8%.

The poor outlook overshadowed Adobe’s stronger-than-expected second-quarter results, with adjusted earnings of 60 cents per share on revenue of $1.12 billion. Wall Street was looking for 59 cents per share on sales of $1.11 billion.

With investors zeroing in on the poor guidance, ADBE shares immediately shed more than 4% to trade below $31.50 in after-hours activity. The stock is now poised to open south of its 10-day and 20-day moving averages, which it last closed beneath on June 5. If the sell-off deepens, the shares have two potential layers of support beneath them in the form of the round-number $30 level and their 50-day moving average.

Options traders appeared prepared for a post-earnings decline. More than 6,500 puts traded on ADBE yesterday, compared to call volume of roughly 5,850 contracts. The result was a bearishly slanted single-session put/call volume ratio of 1.11.

Yesterday’s most active strikes were the July 32 and 33 put strikes, with volumes of 1,705 contracts and 1,527 contracts, respectively. Meanwhile, roughly 1,500 contracts changed hands on both the July 32 and 33 call strikes. Given ADBE’s trading range between $32 and $33 on Tuesday, there should be no surprise that these near-the-money strikes received heavy attention.

However, traders looking to enter a position this morning should carefully consider their options. Since it’s always dangerous to try to “catch a falling knife,” buying puts or bear put spreads may not be the best use of your investment capital. In fact, with a dual layer of technical support near $30, a bull put spread may be a solid strategy for short-term options traders.

Now, prices will certainly change following the open this morning, but at the close of trading last night, a July 28/30 bull put spread was bid at 18 cents, or $18 per pair of contracts. Given this data, a maximum profit of 18 cents is possible if ADBE closes above $30 when July options expire this Friday.

However, there’s the potential for a maximum loss of $1.82, or $182 per pair of contracts, if the stock closes at or below $28 at the end of the week.

Joseph Hargett holds no open positions on any stocks, securities or options mentioned above, nor does he have plans to enter such a position in the next 72 hours.

Endnotes:
  1. ADBE: http://studio-5.financialcontent.com/investplace/quote?Symbol=ADBE

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