Adobe Earnings: Iron Condor Could See 43% Return On Risk

Adobe (ADBE) is due to report next Thursday after the closing bell. The Barchart Technical Opinion rating is a 56% Sell with a weakening short term outlook on maintaining the current direction. 

ADBE rates as a Strong Buy according to 8 analysts with 1 Moderate Buy rating and 13 Hold ratings. Implied volatility is 49.29% which gives ADBE an IV Percentile of 90% and an IV Rank of 73.38%.

Adobe Inc. is one of the largest software companies in the world. Adobe picks up licensing fees from customers, which form the bulk of its revenue. The company also offers technical support and education, which account for the balance. The company operates through three segments. 

The Digital Media solutions segment enables small businesses and enterprises to create highly compelling content, deliver it across diverse media through smartphones, tablets, e-readers, and other devices, and then optimize it through systematic targeting and measurement. 

Within Digital Media, the two major components of revenue are the Creative family of products and Document Services products. The target customers are traditional content creators, web application developers, digital media professionals and user interface designers/developers, writers, videographers and photographers.

Today, we’re going to look at an iron condor trade placed over earnings. These types of trades can be high risk, so make sure you understand how they work before attempting something like this.

An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

ADBE IRON CONDOR

As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.

The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.

First, we take the bull put spread. Using the December 16 expiry, we could sell the 295 put and buy the 290 put. That spread could be sold yesterday for around $0.90.

Then the bear call spread, which could be placed by selling the 365 call and buying the 370 call. This spread could be sold yesterday for around $0.60.

In total, the iron condor will generate around $1.50 per contract or $150 of premium.

The profit zone ranges between 293.50 and 366.50. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.50 x 100 = $350.

Therefore, if we take the premium ($150) divided by the maximum risk ($350), this iron condor trade has the potential to return 42.86%.

If price action stabilizes, then iron condors will work well. However, if ADBE stock makes a bigger than expected move, the trade will suffer losses.

Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss. ADBE has stayed within the expected range following three of the six most recent earnings releases. Although as we know, past performance doesn’t guarantee future performance.

Conclusion And Risk Management

Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short-term trades also have assignment risk, so traders need to be aware of that possibility. This type of trade may not be suitable for beginners.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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