The savvy trader: Exploring 3 options strategies for Adobe's earnings volatility crunch

The savvy trader: Exploring 3 options strategies for Adobe's earnings volatility crunch

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Résumé:  Adobe's upcoming earnings release on December 11 provides an opportunity to explore pre-earnings options strategies such as bull put spreads, iron condors, and bear call spreads. These risk-defined strategies serve as educational examples of how to navigate heightened implied volatility and the anticipated post-earnings IV crush.


The savvy trader: Exploring 3 options strategies for Adobe's earnings volatility crunch


Introduction

Adobe (ADBE) is set to report its Q4 2024 earnings on Wednesday, December 11, after the market close. Earnings events like these often lead to heightened implied volatility (IV) in the options market, as investors anticipate significant price movement. This article explores options strategies that reflect different potential outcomes of the earnings release, focusing on their structure, risk, and reward characteristics.


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.


Pre-earnings volatility and IV dynamics

Earnings announcements are typically preceded by a spike in implied volatility as the market prices in expected movement. As shown in the ATM IV forward curve (see screenshot below), Adobe’s IV for the 13-Dec-2024 expiration is elevated at 109.25%, reflecting heightened uncertainty.

This elevated IV creates opportunities to construct strategies that may benefit from the eventual IV crush that often follows earnings announcements. After the release, IV typically normalizes as uncertainty is resolved, leading to a sharp decline in premiums for near-term options. This dynamic should be a key consideration when planning pre-earnings trades.

Adobe ATM IV Forward Curve, right before earnings-release © Saxo

Expected move: $45 range

Analysis of the 13-Dec-2024 options chain (see screenshot below) indicates a market-implied move of approximately ±$45 based on the at-the-money (ATM) straddle pricing. This translates to an expected price range of $505 to $595 around the current stock price of $550. The strategies discussed below incorporate this range as a key factor in their construction.

Important note: The expected move is a calculated indication based on current option prices. Actual price movements can exceed this range, especially if earnings results significantly surprise the market. It serves as a guideline for structuring options trades.

Adobe 13 December 2024 Expiry Option Chain © Saxo

Strategy 1: bull put spread

The bull put spread is a directional options strategy that anticipates upward price movement or stability within a specified range. It also benefits from a decline in IV post-earnings.

Structure:

  • Sell the 560 put
  • Buy the 540 put
  • Expiration: 13-Dec-2024

This setup generates a net credit, providing a potential profit if the stock price remains at or above $560 by expiration.

Dual screen showing a setup of a Bull Put Spread and a simulation how it would look when volatility drops to levels comparable with later expiries © Saxo and © OptionStrat.com

Key characteristics:

  1. Simulation insights:
    • In the OptionStrat calculator simulation (see screenshot above), the upper strategy window shows how the position might perform on Thursday, the day after the earnings release, accounting for the expected IV drop and stock price movement.
    • The lower strategy window displays the P&L graph at expiration, showing the maximum profit and loss potential based on where the stock settles by the 13-Dec-2024 expiration.
  2. Potential outcomes:
    • If the stock price rises toward the upper boundary of the expected range (approximately $590), the spread can achieve near-maximum profit due to price movement and the IV crush.
    • If the stock remains near the current price, the IV drop alone may still result in a profitable outcome, although less pronounced than with upward movement.
    • If the stock price declines significantly below $560, the strategy incurs a loss, with maximum loss occurring if the stock moves below $540.
  3. Risk-defined:
    • This strategy has a maximum loss of $942, which occurs if the stock falls below $540 at expiration.
  4. Probability of profit (POP):
    • Approximately 54%, reflecting the balance between potential profit and loss.

Key metrics:

  • Net credit: $1,058
  • Max profit: $1,058
  • Max loss: $942
  • Break-even: $549.42

Strategy 2: iron condor

The iron condor is a non-directional options strategy that aims to profit from price stability within a defined range, taking advantage of elevated IV and the subsequent volatility collapse.

Structure:

  • Sell the 505 put
  • Buy the 495 put
  • Sell the 595 call
  • Buy the 605 call
  • Expiration: 13-Dec-2024

This strategy generates a net credit, with maximum profit achieved if the stock remains between the short strikes of $505 and $595.

Dual screen showing a setup of an Iron Condor and a simulation how it would look when volatility drops to levels comparable with later expiries © Saxo and © OptionStrat.com

Key characteristics:

  1. Simulation insights:
    • In the OptionStrat calculator simulation (see screenshot above), the upper strategy window shows the projected position performance on Thursday, the day after the earnings release, incorporating the anticipated IV crush and limited price movement.
    • The lower strategy window displays the P&L graph at expiration, reflecting the maximum profit or loss based on the stock’s final position by the 13-Dec-2024 expiration.
  2. Potential outcomes:
    • Maximum profit occurs if the stock stays within the range of $505 to $595, as both the put and call spreads expire worthless.
    • If the stock breaks out of this range, partial losses occur, with maximum loss realized if the stock falls below $495 or rises above $605.
  3. Volatility consideration:
    • The strategy benefits from the anticipated IV crush post-earnings, which reduces premiums for the short strikes.
  4. Risk-defined:
    • The strategy limits losses through the purchase of protective options on both sides, with a maximum loss of $622.

Key metrics:

  • Net credit: $378
  • Max profit: $378
  • Max loss: $622
  • Break-even points:
    • Lower break-even: $501.22
    • Upper break-even: $598.78

Strategy 3: bear call spread

The bear call spread is a directional strategy designed to capitalize on potential downward movement or stability below a specified price level.

Structure:

  • Sell the 520 call
  • Buy the 560 call
  • Expiration: 13-Dec-2024

This setup generates a net credit, with maximum profit occurring if the stock price remains below $520 at expiration.

Dual screen showing a setup of a Bear Call Spread and a simulation how it would look when volatility drops to levels comparable with later expiries © Saxo and © OptionStrat.com

Key characteristics:

  1. Simulation insights:
    • In the OptionStrat calculator simulation (see screenshot above), the upper strategy window illustrates the position performance on Thursday, the day after the earnings release, based on the expected IV crush and price behavior.
    • The lower strategy window displays the P&L graph at expiration, showing the profit or loss potential depending on the stock’s final price at the 13-Dec-2024 expiration.
  2. Potential outcomes:
    • If the stock moves downward or remains below $520, the strategy achieves maximum profit as the short and long calls expire worthless.
    • If the stock price stagnates near the current price, the IV crush may offset some premium decay, but the call skew may still result in a breakeven or minor loss.
    • If the stock rises significantly above $520, the strategy incurs losses, with maximum loss realized if the stock exceeds $560.
  3. Risk-defined:
    • This strategy has a maximum loss of $1,860, occurring if the stock price moves above $560 by expiration.
  4. Probability of profit (POP):
    • Approximately 29%, reflecting the impact of call skew and the proximity of the short call to the current stock price.

Key metrics:

  • Net credit: $2,140
  • Max profit: $2,140
  • Max loss: $1,860
  • Break-even: $540.43

Conclusion: risk and responsibility in pre-earnings trading

Pre-earnings options strategies offer opportunities to engage with elevated implied volatility and the anticipated post-earnings IV crush. Each strategy discussed here is risk-defined, meaning there is a maximum potential loss, which must be understood and accepted before entering any position. Markets are inherently uncertain, and unexpected outcomes are always possible, particularly during earnings events.

These strategies are presented for educational purposes and are not tailored recommendations. Anyone considering these approaches should conduct thorough due diligence to ensure alignment with their own market outlook and risk tolerance. Multi-leg strategies like these can be complex and may not be suitable for all market participants, particularly beginners. It is essential to approach these trades with a clear understanding of their structure, risks, and potential outcomes.

Happy trading!

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