Adobe Systems Incorporated (NASDAQ:ADBE) stock has been a monster mover of late. Its momentum left no obvious entry points. Last night’s earnings report reminded us why. It’s firing on all cylinders.
I missed the most recent dip to $132. In today’s trade, I want to reenter Adobe stock at a discount if they let me. If not, then I would settle for the premium profit I would collect from selling risk against those levels.
ADBE stock is a premier technology company. Its management adjusted perfectly to the new tech world. They made the turn to the cloud-based model with ease. Subscription-based sales have less chance for piracy and draws more users. Compare those efforts with those of International Business Machines Corp. (NYSE:IBM) who are still struggling to monetize their niche.
Click to Enlarge Fundamentally it’s not all roses. ADBE stock is expensive. It has a price-to-earnings ratio that is twice that of Microsoft Corporation (NASDAQ:MSFT) and three times that of Apple Inc. (NASDAQ:AAPL). So buying it here is far from a slam-dunk investment. In addition, analyst expectations are lofty, thereby raising the risk of a surprise downgrade.
Technically, the stock ramp has been so steep that it perpetually seems due for a pullback. Furthermore, I do have to acknowledge the threat, however minimal, that lies at $132. If ADBE stock loses that level, then momentum sellers would likely press it lower to $125.
This is a calculated risk that I am willing to take, and therein lies the opportunity.
ADBE Stock Trade Idea
The Bet: Sell the ADBE Dec $110 put and collect $1.25 per contract. This is a bullish trade that has 90% chance of winning. But if Adobe stock falls below my strike then I would have to own the shares and could suffer losses below $108.75.
Selling naked puts requires margin as it carries large risk all the way down to zero. To mitigate that risk I would use a spread instead.
The More Moderate Bet: Sell ADBE Dec $115/$110 credit put spread where I stand about the same theoretical chance of success but here I have limited risk. Still, the spread if successful will yield 9%.
The alternative would be to buy ADBE stock at face value and without any room for error. Then hope for a rally to profit. Compare that with the 9% that the spread can deliver. That without the need for any rally. In fact ADBE can fall more than 20% and still this trade would deliver profits out of thin air.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
