Adobe is holding up well during this correction and is looking very sound technically.
According to the IBD Stock Checkup, Adobe stock is ranked No. 1 in its industry group and has a Composite Rating of 98, an EPS Rating of 96 and a Relative Strength Rating of 96.
Today, we're looking at a bull put spread. As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if Adobe stock trades sideways or higher and even sometimes if it trades slightly lower.
With ADBE trading around 514, if we use the Sept. 8 expiration, we can sell a 475 put and buy a 470 put for around $0.70.
Trade Offers Potential 16% Return
Selling this spread would generate roughly $70 in premium with a maximum risk of $430.
If the spread expires worthless, that would be a 16.28% return in just under one month — provided Adobe stock is above 475 at expiration.
The maximum loss would occur if the stock closes below 470 on Sept. 8. That would see the premium seller lose $430 on the trade.
The break-even point for the trade is 474.30, which is calculated as 475 less the $0.70 option premium per contract.
When To Exit Adobe Option Trade
I would set a stop loss if Adobe stock drops below 485. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, it would be $70.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
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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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
