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 . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
