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.
Consider Buying the Post-Earnings Dip in Adobe Systems (ADBE)
Adobe’s stock price has seen a steady rise over the last few years, and from both a technical and fundamental standpoint, there is a strong case to be made that it will continue. These following two articles discuss the recent earnings report and where the stock may go from here – Adobe: Stock Marches Forward With Another Record Quarter and Should You Buy Adobe Systems at Its All-Time High?. As well, there have been several price target upgrades as of late and a few of the more bullish analysts think the stock can even cross above the $300 price point.
ADBE corrected lower in the past week and is seen trading near a significant confluence of support. The 50-day moving average is coming into play, a horizontal level at $256 that was respected as both support and resistance last month, and two rising trend channels. The small channel formation originates from a low posted in late July while the longer term trend channel has encompassed price action for a few days short of a year.
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 five weeks, or at least not decline very much.
Buy To Open ADBE 26OCT18 255 Puts (ADBE181026P255)
Sell To Open ADBE 26OCT18 260 Puts (ADBE181026P260) for a credit of $1.97 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when ADBE was trading near $261. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will be $2.50 per spread. Each contract would then yield $194.50 and your broker would charge a $500 maintenance fee, making your investment $305.50 ($500 – $194.50). If ADBE closes at any price above $260 on October 26, both options would expire worthless, and your return on the spread would be 64% (730% 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.