Post-Earnings Options Strategies in Adobe (NASDAQ:ADBE)

ADBE " src="http://farm1.static.flickr.com/105/292233820_5d4f252dda.jpg" alt="Post-Earnings Options Strategies in Adobe ADBE " width="300" height="300" />Shortly following Tuesday night’s earnings release from Adobe Systems ADBE, Maxim Group upgraded the stock to “buy” from “hold” and lifted its 12-month price target to $40 from $38. The shares had dipped lower in response to the company’s quarterly earnings, which surprised in terms of per-share earnings and revenue but the company’s third-quarter outlook failed to impress traders.

The company expects to earn between 46 and 50 cents per share in the current quarter, compared to analysts’ estimates of 48 cents. In other words, if ADBE earnings come in toward the lower end of this range, they will fall short of current estimates. This lackluster guidance, coupled with concerns about an ongoing unpleasantness with Apple AAPL, sparked some selling pressure on the day.

Maxim has faith in the software company, though, noting a “solid” response to the release of the Creative Suite 5 software bundle. The firm expects that much of the loyal Adobe user base will opt to upgrade as consumer and corporate spending chugs higher.

Although brokers and analysts are restricted to the “buy,” “hold,” and “sell” scale of ratings, option traders have multiple strategies at their disposal that can be used in a variety of scenarios. These strategies can be fine-tuned depending on an investor’s trading outlook and can be impacted by forces other than just the stock itself (including time and implied volatility). Two option strategies on ADBE – one bullish, one bearish – are detailed below. Remember these are hypothetical examples, not recommendations. Consider your risk/reward parameters and trading goals before executing any new trades.

*Prices given as of Thursday afternoon. ADBE was trading at $30.39.

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Bullish Option Strategy: Synthetic Long Stock

Investors who agree with Maxim analysts and believe Adobe will bounce higher in the next six months could trade a split strike synthetic long stock strategy, which mimics the behavior of a long stock but requires less capital up front. Currently, an investor could go long the January 35 call, paying a debit of $1.30, and simultaneously short the January 28 put, collecting a credit of $2.00. The net credit for the spread, therefore, is 70 cents. From execution through expiration, this spread will behave similar to a long stock position – gaining value as the stock rises, losing value as the stock falls. At expiration, if ADBE is trading anywhere between 28 and 35, the investor keeps the 70-cent credit as profit. Above the 35 strike, gains are theoretically unlimited. Below the lower breakeven ($27.30), however, at expiration, losses accrue dollar for dollar with stock losses, capped at $27.30 in the unlikely event that ADBE falls to zero.

Profit/Loss of Adobe (ADBE) synthetic long stock

Bearish Option Strategy: Bear Put Spread

Investors concerned about continued downside in ADBE could buy a short-term bear put spread. The August 35/30 put spread is currently priced at a net debit of $3.70 (buying the 35-strike put, selling the 30-strike put). The most the put-spread buyer can lose is the premium paid ($3.70), which occurs if ADBE is trading above $35 when the options expire. If ADBE is trading below $30 at expiration, the maximum gain is equal to $1.30 per spread. Breakeven for this spread is $31.30 at expiration; the trade will be profitable if ADBE is below this level on August 20 when the positions expire. Of course, the trader can chose to exit the trade at any time prior to expiration by selling the spread to close.

Profit/Loss of Adobe (ADBE) bear put spread