Can ADBE (ABDE) Hold Above the $500 Price Point?

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.

ADBE has doubled from its March low and the following two articles lay out reasons why the stock may continue to gain. One of them even makes a case that the stock is undervalued at current levels, despite to impressive rally as of late – Adobe’s Stock To Continue Growing? and Adobe (ADBE) Up 6.4% Since Last Earnings Report: Can It Continue?

Technicals

After correcting lower last month, ADBE is starting to once again show signs of upward momentum. The stock has posted a series of higher highs and higher lows over the last four weeks as it oscillates higher in a rising trend channel. Buyers have defended the lower line of the channel as well as dips towards the 20-Day moving average. Further, a break above the $500 level earlier this month is a sign of strength. Strong near-term support is seen in the $492-$500 area.

ADBE Chart October 2020

If you agree there’s further upside ahead for ADBE, consider this trade which relies on the stock remaining above the $500 level through the expiration in five weeks.

Buy To Open ADBE 20NOV20 495 Puts (ADBE201120P495)
Sell To Open ADBE 20NOV20 500 Puts (ADBE201120P500) for a credit of $2.08 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when ADBE was trading near $503.  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 $206.70. This reduces your buying power by $500 and makes your investment $293.30 ($500 – $206.70).  If ADBE closes at any price above $500 on November 20, both options will expire worthless, and your return on the spread would be 70% ($206.70 / $293.30), or 798% annualized.

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates October 17, 2020

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.

Happy trading,

Terry