Why Adobe Stock Could Jump After Earnings (ADBE)

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Business software specialist Adobe Systems Incorporated (ADBE) is slated to slip into the earnings confessional after the close of trading Thursday afternoon to release its fourth-quarter earnings figures. Wall Street is anticipating a quarterly profit of 30 cents per share, but Creative Cloud subscription growth might be the real story that ends up driving direction for Adobe stock.

Adobe Systems Incorporated (ADBE)Back in September, Adobe forecast that fourth-quarter earnings would arrive between 26 and 32 cents per share, placing the consensus estimate near the high end of the company’s range. Creative Cloud subscriptions, which are a barometer of the company’s Cloud presence and digital revenue, are expected to rise to nearly 3.3 million, up from 2.8 million paid last quarter.

Revenue for the quarter is seen arriving at $1.06 billion, versus Adobe’s prior guidance for sales in the $1.025 billion to $1.075 billion range.

Actually expectations may be higher, however, given Adobe’s strong track record in the earnings limelight. Specifically, the company has bested Wall Street’s estimates in three of the past four quarters by an average of nearly 20%. Along those lines, EarningsWhisper.com reports that the fourth-quarter whisper number for Adobe stands at 32 cents per share.

That positive sentiment is pervasive in the sentiment backdrop for Adobe stock. For instance, data from Thomson/First Call reveals that 12 of the 20 analysts following ADBE rate the shares a “buy” or better, compared to eight “holds” and no “sell” ratings. On the other hand, there is room for improvement, as the 12-month consensus price target of $80 represents a premium of about 12% to yesterday’s close at $71.57.

Options traders are jumping on the bullish bandwagon, too. Specifically, the December put/call open interest ratio for Adobe stock arrives at a reading of 0.33, with call open interest roughly tripling put open interest among options set to expire this month. Peak call open interest resides at the in-the-money $70 strike, totaling 5,562 contracts, with another 1,584 and 1,284 open at the $72.50 and $75 strikes, respectively.

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Taking a closer look, we find that December implieds are pricing in a potential post-earnings move of about 6.2% for Adobe stock. This places the upper bound near $74.31, while the lower bound lies at $65.69.

Technically, the potential upside following Thursday’s report is far from groundbreaking, with ADBE coming up just shy of staunch overhead resistance near $75. Meanwhile, a selloff could take the shares down for a test of support near $65, sending the stock well below short-term trendline support.

2 Options Trades on Adobe Stock

Shares of Adobe stock have shown weakness heading into tomorrow’s report, but Adobe’s current uptrend remains largely undisturbed. Barring any major glitches or surprises, the shares should resume their uptrend in the wake of Adobe’s earnings report. As such, those looking for an options trade on ADBE stock ahead of earnings might want to side with the bulls.

Bull Call Spreads: One such opportunity to consider is the Dec $70/$72.50 bull call spread. At last check, this spread was offered at $1.38, or $138 per pair of contracts. Breakeven rests at $71.38, while a maximum profit of $1.12, or $112 per pair of contracts, is possible if ADBE stock closes at or above $72.50 when December options expire.

Selling Puts: Alternately, if you’re not sold on ADBE stock’s upside potential, a Dec $62.50 put sell has a high probability of finishing out of the money. As of the close last night, this option was bid at 22 cents, or $22 per contract. As usual with a put sell, you keep the premium as long as ADBE stock closes above $62.50 when December options. On the downside, if ADBE trades below $62.50 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $62.50 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/adobe-stock-adbe-earnings-options/.

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