from the desk of Dr. Terry F Allen

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Adobe (ADBE) Accelerates Uptrend

On March 23, ADBE reported earnings that easily beat estimates on both revenue and profits. Moreover, the company raised earnings and revenue guidance for the fiscal year. In response, several analysts raised their price targets. Despite the positive news, the stock price was sluggish in the two days following the report. Perhaps that was a response to the 10% rally that began two weeks before earnings.

After those two days, however, the stock resumed its winning ways, gaining ground in four of the next five days. In the process, ADBE crossed above its 50-day and 200-day moving averages. In addition, the 50-day is rolling over into an uptrend for the first time since late October. The stock is now on a 15% rally off the March 8 bottom with no areas of resistance until the 505 level, the site of highs in November, December and January. That leaves room for another 5% of upside.

ADBE Chart April 2021

ADBE Chart April 2021

If you agree that ADBE will stay above its 50-day and 200-day moving averages, consider the following trade that relies on the stock remaining above $475 through expiration in seven weeks.

Buy to Open ADBE 21May21 470 Put (ADBE210521P470)
Sell to Open ADBE 21May21 475 Put (ADBE210521P475) for a credit of $1.90 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when ADBE was trading above $483. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $188.70. This trade reduces your buying power by $500 and makes your investment $311.30 ($500 – $188.70).  If ADBE closes above $475 on May 21, both options will expire worthless and your return on the spread would be 61% ($188.70 / $311.30).

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $188.70. This trade reduces your buying power by $500 and makes your investment $311.30 ($500 – $188.70).  If DRI closes above $145 on May 21, both options will expire worthless and your return on the spread would be 61% ($188.70 / $311.30).

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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