ADBE - Earnings 6/16 - Serial Underperformer and IV Rush Play

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Placeholder for now, will need to build on this

Adobe continues to drill with the market heading into their earnings and history tells us that they won’t fare well through earnings. We’re coming down to our COVID lows with this ticker, but it looks like they are struggling to perform consistently over their past 3 earnings.

This DD will be a placeholder for now to review their past earnings, but historically the ticker runs up prior to earnings and then drills once released.

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My opinion is that due to the severity of the drop on the past three earnings and the runup into earnings, IV on these options chains may build very quickly starting next week. It may be wise to watch ADBE for a pre-earnings strangle with intention to sell by Wednesday, June 15.

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Still a work in progress but I want to spell out my strategy and at least my initial thoughts to begin conversation.

[size=3]Findings[/size]
To analyze the previous earnings for the dips, I’ve found that they’re pretty good at beating EPS and revenue, but what’s suffering is their forward guidance. They’ve lowered guidance for the past two earnings calls and it shows in their performance.

Someone more involved with ADBE as SaaS can likely pipe up on what their outlook might be, but given hiring freezes and general cost-cutting initiatives being taken ahead of a probable recession by numerous tech companies I would think that revenue may show as flat for this ER. Fortunately for many of these software partners the act of killing a subscription to SaaS is easier said than done, especially after significant investments have been made into them, so I’m not expecting massive loss of revenue.

On Tuesday, the Shantanu Narayen-led Adobe (ADBE) said it expects to earn $3.30 per share on $4.34 billion in revenue. Analysts were expecting the company to earn $3.35 per share and $4.4 billion in sales.

Adobe dips on weak Q2 guidance, Street worries about Russia-Ukraine conflict (NASDAQ:ADBE) | Seeking Alpha

[size=3]Peers in the Space[/size]
Related peers in the space include Oracle (ORCL), VMWare (VMW)

VMWare is currently being targeted for a buyout by Broadcom so I’m going to focus on ORCL.

Oracle’s earnings are slated for Monday after hours. This presents an interesting potential to go on a sympathy and IV ride for ADBE’s ER call on Thursday after market close.

[size=3]How I Will Play This[/size]
IV runs on earnings are a good source of gains, and having a peer having their earnings a few days prior to them will help set the tone on ADBE up until their earnings. My intention is to enter a strangle on Monday and cut one leg of it on Tuesday morning after ORCL earnings are announced.

Monday, June 13
Take two strikes:

  • +25C above the stock price
  • -25P below the stock price

Tuesday, June 14
Sell off whichever strike is in the opposite direction that ORCL moved and proceed to hold.

Thursday, June 16
Sell the remaining option by 3PM EDT

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Bid/ask spread on this one was awful and the premiums were wild stuff but I got a good fill on my put leg and a great fill on my call. Because of the premiums and the spread I will admit this is a very wide strangle, I like to think of it as like strangling John Cena. The Put is already performing very well, the Call is begging to be put out of its misery.

10 340P 6/17 - Cost basis of $3.59
10 412.50C 6/17 - Cost basis of $4.50

As it stands the put is up 33.7% and the call is down 10% even. Total profit at the moment is $740.00, or just under 10% of cost. The intention is to hold this overnight so I’m going to eat a bit of Theta. My expectation is that based on ORCL earnings we’re going to see a sympathy movement in ADBE and also an IV rush into position based on that. Currently we are profitable thanks to the market not being flat and taking ADBE for a ride.

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Curious your pnl and where you took profit, this play pretty much panned out perfectly.

Also bump for community as earnings are tomorrow. Personally am bearish on this stock. A lot of analysts lowered their price targets (but still have a buy signal). ADBE currently trading at exactly preCOVID levels which is an interesting area.

Given its high PE ratio and the sell off of tech stocks, could see some selling frenzy, but maybe markets are overall bullish from the Fed news today. The stock does not move much historically from earnings, so the IV is actually not that high. If you’re expecting large movement, a straddle might be a good play.

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Oh goodness thanks for the reminder!

I actually ate the overnight theta from Monday into Tuesday on the call leg, sold for a loss of $1250 whereas theta was $1.25, so despite fluctuations in underlying, the changes in IV and ultimately Vega kept it afloat to net neutral before theta.

The put leg performed much better, selling for a $1900 gain, ultimately yielding me $650 or just under 10%. Not shabby for a safer way to play it and I learned some good stuff.

Namely theta is your biggest enemy in these earnings strangles but Vega can keep both legs healthy. It’s better to play every day at open and sell by midday before theta strikes but where you can actually profit on both legs. There were points on Monday in which both legs were up considerably and I should have sold, but the put leg was up enough to let me let my thesis on ORCL pan out (it kind of did but also didn’t because ORCL killed it.)

Also strangles should be tighter. The premiums on this one is what kept me away from closer strikes but targeting lower value tickers I think the play would be more optimal.

Today likely would have been the best day to enter and exit. Holding until now I would have lost on both legs as the put side is only up $1.00 from the original price I took it at. It could be up higher in the morning after their earnings performance and if the market generally continues it’s downtrend, but IV crush will set in quickly as it’s still OTM.

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