This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.
Adobe Systems (ADBE): A Stable and Consistent Player
The following two articles suggest ADBE offers good value at current prices – Is Advanced Micro Devices Stock Undervalued? and AMD Stock’s Fall Has a Silver Lining for Value Investors.
From a technical perspective, the recent decline in Adobe’s stock price resembles a consolidation more than correction, which suggests some underlying strength. This is especially important considering the heightened volatility in the equity markets as of late. Price action in ADBE over the last month or so has not altered the bullish technical outlook as the buyers protected support near the 50-day moving average at $212. Once again, this is significant and supports the view of strength in Adobe’s stock price as several stocks, including those on the IBD Top 50 list, have broken below notable support either in the form of a relevant moving average or a horizontal level.
ADBE Chart April 2018
If you agree there’s further upside ahead for ADBE, consider this trade which is a bet that the stock will continue to advance over the next four weeks, or at least not decline very much.
Buy To Open ADBE 25MAY18 220 Puts (ADBE180525P220)
Sell To Open ADBE 25MAY18 222.5 Puts (ADBE180525P222.5) for a credit of $0.80 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when ADBE was trading near $224. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will only be $2.50 per spread. Each contract would then yield $77.50 and your broker would charge a $250 maintenance fee, making your investment $172.50 ($250 – $77.50). If ADBE closes at any price above $222.50 on May 25, both options would expire worthless, and your return on the spread would be 45% (360% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run. Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.
As with all investments, you should only make option trades with money that you can truly afford to lose.
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