Yahoo Finance Adobe Systems Incorporated (ADBE) Stock Dips Are Opportunities — Go Long!
Adobe Systems Incorporated (NASDAQ:ADBE) reported earnings yesterday and Wall Street sold it in droves. Even though the report was decent, the stock fell 4%. This doesn’t speak to the quality of the numbers but rather to the fact that traders had lofty expectations for this proven performer.
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Fundamentally the stock is not cheap from a price-to-earnings perspective. A 50 P/E is high even relative to the sector. But since it delivers impressive growth and solid margins it can command a premium. Management leaves little reason for criticism.
ADBE seems to have made that turned into the new normal of technology which is based on the cloud. They’ve embraced the subscription model which I believe lowers the temptation for piracy overall. As a result they have a great base from which they grow their future offerings.
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This fundamental advantage translates into technical proof. The trend in Adobe stock has been undeniable from the lower left to the upper right. Even after this 4% setback, Adobe still looks good to me. And therein lies the opportunity.
Some knives are easier to catch than other. ADBE stock is one of the easy ones. I can go long this dip and leave room to spare. Today I share a bullish trade but without chasing the hopium of an immediate rebound. I can do this using the options and not by buying the stock outright. This way I can build myself a buffer zone to allow room for error. I have more faith in proven supports than in chasing upside performance.
Analysts predominantly rate Adobe stock as a buy. This could be a source of problems if they decide to downgrade it. But I don’t think that’ll happen without a material change in the fundamentals. I don’t expect that in the medium term. Current price is closer to the upper end of the range of their price targets, so that too is a mild concern — but certainly not a deal breaker.
Technically and on this dip, ADBE stock should have support at $148 per share. This is a pivotal zone which was resistance up until July. Since then, it has served as support and it may be retested soon. Even if it fails, $144 would be the next level to watch and for to same reasons. That pivot zone dates back to May of 2017. Below those two, the area around $138 per share is next one of interest.
These levels noted that are not a path forecast, but rather levels that I’ll be watching in case Adobe continuous following. Knowing them will guide me as I manage my risk.
ADBE Stock Trade Idea
The Bet: Sell ADBE Jan $120 put and collect $1 to open. This is a bullish trade where I have an 85% chance that I will keep maximum gains. But if the price falls below my strike then I will accrue losses below $119.
The Alternate Bet: Sell ADBE $125/$120 credit put spread. This spread has about the same odds of winning and it could yield 8% on risk.
There are no guarantees when investing in stocks so I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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