ADBE Earnings Strangle Option Trade

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Earnings trade: In tonight's video we're going to talk about the one earnings trade that we did have today in Adobe for Tuesday, June 16th. Sorry this video's a little bit late, just got in from a family function so just trying to get this out, as always, to you guys. We did enter a new trade in Adobe, which was an earnings trade. We're not really in earning season but we still have some earnings trades that are coming up this week.

I know Adobe and then we have Oracle tomorrow, which should be a trade that we'll get into so we'll continue to make earnings trades as they come up. I know some of these don't actually happen in the heart of earning season, but nevertheless, there's still great opportunities to make some good trades.

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In the case of Adobe, we went ahead and did the strangle around Adobe just outside of the expected move. We sold the June monthly contracts, which are actually acting as the weekly contracts because they expire this week. They are the front most contracts. We did the 85 call and the 75 put on the market, so we've got a pretty nice $10 range around where Adobe closed today.

We collected another dollar credit on this, so that moves our break even points out another dollar beyond that. Here's a look at the chart of Adobe. You can see implied volatility heading into earnings, about 66%.

Every time that it's had earnings it's had pretty good drop in implied volatility, so I'm not assuming, or I'm definitely assuming that we're going to see another good crush around earnings for Adobe, which really helps out with our position. You can see the stock closed just under $80 today, so our short strikes are about $5 above and $5 below the market.

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Here's a look at the trade tab here. You can see the stock closed just below $80 and the market maker moved for Adobe around earnings was just about $4. By placing our short strikes at 75 and 85 that puts us a dollar beyond the expected move, plus we collected a dollar credit, so that puts us almost $2 beyond the expected move on either end.

You can see after hours that Adobe is trading just a little lower. I think the bid-ask spread kind of widened out here, but the stock's trading just a little bit lower after hours, so not a huge move and definitely not the expected move. All-in-all it should actually workout to be a pretty good trade tomorrow.

Again, we'll look to manage this trade early in the morning, try to close it out right after the market opens as soon as we see a lot of that implied volatility come out of this security. Just one quick note too, it's got really good volume and liquidity. That was always a key for us when we get into some of these earnings trades is volume and liquidity.

You can see there's no shortage of that today with Adobe. Very, very active security. Lots of contracts trade today. Lots of open interest, so very easy to get into and out of these positions. Like I said. Hopefully, you guys enjoyed this video.

As always, if you have any comments on the Adobe trade, please ask me in the comments section right here on the trade alerts page, that way everyone gets to see the question and see the answer and that helps everyone in this community grow and learn a little bit more about trading. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.