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John J. Hardy
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Investing with options - Adobe earnings
Koen Hoorelbeke
Investment and Options Strategist
Summary: Adobe's recent dip before earnings release creates opportunities and risks for investors, and options strategies can help navigate the turbulent waters. In this article we take a look at those opportunities and how you could profit or control risk using various options techniques/strategies.
Investing with options - Adobe earnings
In the technology sector, Adobe is a notable company working diligently to showcase the profitability and success achievable through AI business ventures. The question on everyone's mind is whether the AI sector is a goldmine or just a marketplace for shovels (NVDA GPU's), a query that seems more pertinent as we approach Adobe's earnings release.
With a recent dip of 3.95% just two days before the earnings announcement, a swirl of opportunities and risks arise, beckoning investors with varying appetites. As we delve into potential strategies leveraging options, we carry forward the insights shared in our previous "From zero to hero" series, aiming to guide you in navigating these turbulent waters with informed decisions.
Investor's Note
Implementing the strategies illustrated below before the earnings release can potentially amplify your returns; however, it significantly elevates the risk. The choice hinges on your risk appetite, encouraging a path of prudence and strategic foresight.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Strategies to consider
Bullish outlook - buying call options
For those optimistic about Adobe's prospects, buying the dip could be a golden opportunity. Through options, this strategy morphs into purchasing a call option, allowing you to capitalize on potential upward movements without owning the stock. Here's a setup for your consideration:
Strategy: buying a call option
- Trade setup:
- Action: BuyToOpen
- Quantity: 1
- Expiry: 21-Jun-2024
- Strike: 450
- Premium: $135.15 (per share)
- Premium and risk:
- Premium cost: $135.15 x 100 (per contract) = $13,515
- Max risk: $13,515 (if Adobe is below 450 at expiry)
- Max reward: Unlimited (potential gains amplify as Adobe's stock price rises)
- Breakeven Point: $450 (strike) + $135.15 (premium) = $585.15
- Comparison with buying stock: Leveraging the stock's potential upward movement while limiting the downside risk to the premium paid. It requires a smaller initial investment compared to buying 100 shares at the current price of $541.07.
Bullish outlook - buying stock using ITM put options
Dipping into the insights shared in our series, selling an in-the-money (ITM) put option emerges as a strategy to potentially acquire Adobe stocks at a discount.
Strategy: selling an in-the-money put option
- Trade setup:
- Action: SellToOpen
- Quantity: 1
- Expiry: 15-Sep-2024
- Strike: 550
- Premium: $18.90 (per share)
- Premium and risk:
- Premium received: $18.90 x 100 (per contract) = $1,890
- Max risk: Significant (potential obligation to buy the stock if it falls below the strike price)
- Max reward: $1,890 (retained premium if Adobe stays above 550 at expiry)
- Breakeven point: $550 (strike) - $18.90 (premium) = $531.10
- Comparison with buying stock: This strategy can potentially allow you to acquire Adobe stocks at a discounted rate compared to the current market price, with the added benefit of premium retention.
Bearish outlook - buying put options
If you foresee a period of decline for Adobe, buying a put option could be your ally, helping you profit from a potential downturn.
Strategy: buying a put option
- Trade setup:
- Action: BuyToOpen
- Quantity: 1
- Expiry: 21-Jun-2024
- Strike: 640
- Premium: $108.35 (per share)
- Premium and risk:
- Premium cost: $108.35 x 100 (per contract) = $10,835
- Max risk: $10,835 (if Adobe stays above 640 at expiry)
- Max reward: Substantial (grows as Adobe's stock price decreases)
- Breakeven point: $640 (strike) - $108.35 (premium) = $531.65
- Comparison with buying stock: This strategy mitigates the risk of short selling, providing a safer route to profit from a potential decline in Adobe's stock price.
Bearish/bullish outlook - writing covered calls
For Adobe stockholders, writing a covered call might offer an avenue to earn additional income, leveraging the stocks you already own.
Strategy: writing covered calls
- Trade setup:
- Action: SellToOpen
- Quantity: 1
- Expiry: 22-Sep-2024
- Strike: 575
- Premium: $6.10 (per share)
- Premium and risk:
- Premium received: $6.10 x 100 (per contract) = $610
- Max risk: Moderate (missing out on potential upside if Adobe's stock price surges past 575)
- Max reward: $610 (retained premium if Adobe stays below 575 at expiry)
- Breakeven point: Current stock price – premium received = $541.07 - $6.10 = $534.97
- Yield:
- Yield over 10 days: 1.13%
- Annualized yield: 41.25%
- Comparison with buying stock: If you are an Adobe stockholder, this strategy allows you to earn a yield of 1.13% over 10 days, which equates to an annualized yield of 41.25% if replicated successfully throughout the year, by agreeing to sell the stock at a predetermined price within a ten-day period.
Conclusion
As Adobe gears up to showcase its earnings, the market pulsates with opportunities and risks, presenting a canvas for investors to paint their strategies with strokes of caution and optimism. While the outlined strategies offer pathways to navigate the earnings release, it remains pivotal to align them with your risk tolerance and financial goals, cultivating a garden of calculated decisions in the vibrant landscape of options investing.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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