This morning, we’re recommending a covered call on Adobe Systems, Inc. (NASDAQ:ADBE). We’ve been managing a position in ADBE since our ADBE August 9th $302.50 Put Write expired in the money.
After dropping to support at 2,960 last Tuesday, the S&P 500 has held firm. It didn’t move higher, but it also didn’t moved any lower.
We are expecting more consolidation on Wall Street, which means this is a great time to take advantage of the benefits of selling covered calls.
Covered calls work especially well during periods of consolidation because you can sell a strike price that is closer to the current stock price with less risk of the option will expire in-the-money. That means there’s a greater likelihood you’ll get to keep the entire premium if the option expires out-of-the-money. Then you’ll be able to sell another covered call against the same stock in the future.
Technology stocks, as represented by the Technology Select Sector SPDR Fund (NYSEARCA:XLK), are in a tight range, and we think they’ll continue to consolidate.
Daily Chart of Technology Select Sector SPDR Fund (XLK) — Chart Source: TradingView
Unlike the rest of the sector, ADBE broke out of its technical formation, providing us a good opportunity to take a covered call at a higher strike price while still collecting decent premium.
Getting More Aggressive With a Lower Strike
We’ve been watching ADBE consolidate in a down-trending “wedge” for two months now. Last week, the stock finally broke above the down-trending resistance level that forms the top of that wedge. However, by Friday, the price action completely wiped out those gains and created a bearish engulfing pattern.
Daily Chart of Adobe Systems, Inc. (ADBE) — Chart Source: TradingView
We recommend selling a call with the $290 strike price because the bearish movement on the stock chart tells us we can be more aggressive with a lower strike price. When selling this call option, we want to collect as much premium we can. We will have an opportunity to re-evaluate our strike price if we sell another covered call against the stock in a few weeks.
We recommend choosing an expiration date that offers plenty of liquidity. That way we can exit the trade with ease if we want to roll this trade out.
To find out which ADBE covered calls we’re selling—and to get access to our full portfolio of income-generating trades—sign up for a risk-free trial of Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.