Adobe (ADBE) is due to report earnings after the market close on June 13th. The Barchart Technical Opinion rating is a 100% Sell and ranks in the Top 1% of all short term signal directions.
Long term indicators fully support a continuation of the trend.
The market is in highly oversold territory. Beware of a trend reversal.
ADBE rates as a Strong Buy according to 22 analysts with 1 Moderate Buy rating, 6 Hold ratings and 2 Strong Sell ratings. Implied volatility is 44.28% which gives ADBE an IV Percentile of 93% and an IV Rank of 84.96%.
Adobe Inc. is one of the largest software companies in the world.
Adobe picks up licensing fees from customers, which form the bulk of its revenue.
The company also offers technical support and education, which account for the balance.
The company operates through three segments.
The Digital Media solutions segment enables small businesses and enterprises to create highly compelling content, deliver it across diverse media through smartphones, tablets, e-readers, and other devices, and then optimize it through systematic targeting and measurement.
Within Digital Media, the two major components of revenue are the Creative family of products and Document Services products.
The target customers are traditional content creators, web application developers, digital media professionals and user interface designers/developers, writers, videographers and photographers.
Adobe Earnings Iron Condor
Today, we’re going to look at an iron condor trade placed over earnings. These types of trades can be high risk, so make sure you understand how they work before attempting something like this.
An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Trade Setup
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the June 13th expiry, we could sell the $390 put and buy the $380 put. That spread could be sold yesterday for around $1.25.
Then the bear call spread, which could be placed by selling the $500 call and buying the $510 call. This spread could be sold yesterday for around $0.95.
In total, the iron condor will generate around $2.20 per contract or $220 of premium.
The profit zone ranges between $387.80 and $502.20. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $10 wide, the maximum risk in the trade is 10 – 2.20 x 100 = $780.
Therefore, if we take the premium ($220) divided by the maximum risk ($780), this iron condor trade has the potential to return 28.2%.
If price action stabilizes, then iron condors will work well. However, if ADBE stock makes a bigger than expected move, the trade will suffer losses.
Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss.
Conclusion And Risk Management
Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short-term trades also have assignment risk, so traders need to be aware of that possibility. This type of trade may not be suitable for beginners.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
