Earnings Could Revive Adobe Systems Incorporated (ADBE)

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It’s earnings time once again for Adobe Systems Incorporated (NASDAQ:ADBE), and Wall Street has its sights set on strong year-over-year gains for the business software specialist.

Earnings Could Revive Adobe Stock (ADBE) From Its SwoonBut price action hasn’t been kind to Adobe stock in September, and the shares find themselves staring up at potential resistance at $100. Will earnings provide the spark ADBE needs to reclaim the century mark?

Expectations are pretty solid for Adobe earnings. Currently, Wall Street sees Adobe earnings rising 34.6% year-over-year to 72 cents per share. Meanwhile, revenue is expected to rise 19% to $1.45 billion.

Given Adobe’s history of topping the consensus estimate, it should come as no surprise that there are whispers of a stronger report circulating on the Street. Specifically, EarningsWhispers.com reports a third-quarter whisper number of 74 cents per share for Adobe — two cents better than the consensus.

Sentiment overall is rather bullish for Adobe stock. For instance, according to Thomson/First Call data, 21 of the 26 analysts following ADBE rate the shares a buy or better, with no sells to be found. Additionally, the 12-month price target of $112.46 represents a premium of about 12.9% to yesterday’s close.

There is a touch of trepidation within the options pits for Adobe stock heading into next week’s quarterly earnings report, however. Currently, the October put/call open interest ratio rests at 0.88, with calls only just outpacing puts in the series most affected by ADBE’s earnings report. Peak call OI for the series totals 4,700 contracts at the $105 strike, with both the $100 and $110 attracting more than 2,000 contracts each.

Adobe Stock
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Overall, implieds are pricing in a potential post-earnings move of about 6.75% for Adobe stock. This places the upper bound at $105.67, while the lower bound rests at $92.33.

Technically speaking, both of these bounds represent long-term support/resistance levels for ADBE — the stock’s 50-day moving average lies near $93, while $105 represents all-time high territory for Adobe stock. With the recent decline erasing an overbought condition, the path of least resistance appears to be to the upside — broader market willing.

2 Trades for Adobe Stock

Call Spread: Adobe’s pullback heading into next week’s report offers up a nice entry point for a long position. Traders looking to bet bullish on ADBE stock ahead of earnings might want to consider an Oct $100/$105 bull call spread. At last check, this spread was offered at $1.90, or $190 per pair of contracts.

Breakeven rests at $101.90, while a maximum profit of $3.10, or $310 per pair of contracts, is possible if Adobe stock closes at or above $100 when October options expire.

Put Sell: Alternately, if you’re not sold on Adobe’s upside potential, or are worried about the potential impact of broader market concerns (a.k.a., next week’s Federal Open Market Committee meeting) an Oct $90 put sell has a high probability of finishing out of the money. At last check, this option was bid at 78 cents, or $78 per contract.

As usual with a put sell, you keep the premium as long as Adobe closes above $90 when October options expire. On the downside, if ADBE trades below $90 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $90 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/2016/09/adobe-stock-adbe-swoon/.

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