Adobe Inc ADBE shares are up 78.7% over the past year, but at least one large option trader is betting Tuesday afternoon’s earnings report will be the end of the rally for now.
The Adobe Trades: On Tuesday, Benzinga Pro subscribers received two option alerts related to unusually large Adobe trades.
- At 12:30 p.m., a trader sold 2,500 Adobe call options with a $510 strike price expiring on Oct. 16 at the bid price of $22.68. The trade represented a more than $5.6-million bearish bet.
- Less than a minute later, a trader bought 2,500 Adobe put options with a $510 strike price expiring on Friday at the ask price of $24.43. The trade represented a more than $6.1-million bearish bet.
Why It’s Important For Adobe Investors: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.
Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.
Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge.
In this case, given the relatively large size of the put purchase on Tuesday, it could certainly be an institutional hedge.
Adobe Earnings Miss Coming? The most obvious explanation for the large put purchase on Tuesday is that a deep-pocketed trader simply believes Adobe is going to report some disappointing fourth-quarter earnings numbers on Tuesday.
Adobe has gotten some love from Wall Street ahead of the report. On Friday, Cowen upgraded the stock to Outperform and raised its price target to $555, citing multiple catalysts such as accelerating cloud spending. Cowen also said it's expecting big earnings numbers from Adobe.
Analysts are expecting Adobe to report fiscal third-quarter earnings per share of $2.41 on revenue of $3.16 billion, up 11.3% from a year ago.
If Tuesday’s large option trader knows something about Adobe’s report before it’s official release, the rest of the market certainly doesn’t. Adobe shares were trading higher by 2.5% on Tuesday ahead of the release.
Benzinga’s Take: Given the timing of the trades, the sizes of the trades and the fact that they are both relatively short-term contracts, it at least appears as if the trader cashed out of a bullish position in Adobe in favor of a bearish one ahead of earnings. The puts purchased have a break-even price of $485.57, suggesting at least 4.8% downside by the end of the week.
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