Q1 earnings season is in the rearview mirror, but a few tech heavyweights are on the calendar, including Adobe (ADBE). Last month, Adobe shares broke through the 400 level in heavy volume and may be on the verge of a slump from a long base that began in mid-August.
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Software stocks sold hard on Wednesday, including Adobe, which fell 3.4% in heavy volume. But ADBE held above its 10-day moving average. Shares rose sharply on Thursday after the company introduced a new platform for its Firefly generative AI model for enterprise clients, where users can generate images from text descriptions.
Shares rose again early on Friday after Wells Fargo upgraded Adobe shares to overweight them with a price target of 525. Mizuho raised ADBE’s price target from 375 to 450.
Oracle (ORCL), meanwhile, continues to show relative strength after breaking out of an entry of 91.22 in late March. ORCL stock has made excellent progress since then, finding support at the 21-day exponential moving average along the way.
Oracle’s results will be released Monday after the close. Zacks consensus estimate is for adjusted earnings of $1.58 per share, up 3% from a year ago. Revenue is expected to rise 16% to $3.74 billion. This follows revenue growth of 18% for three consecutive quarters.
Adobe Stock Shows Bullish Action
Adobe’s previous two earnings reports have brought buyers into the stock. When the company reported results on March 16, shares jumped nearly 6% after ADBE reported a 13% increase in quarterly profit, with revenue up 9% to 4.66 billion. of dollars. Revenue from the company’s digital media segment, which includes Creative Cloud, generated $3.4 billion in revenue, up 9%.
Creative Cloud accounted for the majority of Adobe’s revenue in fiscal year 2022, with $11.6 billion in annual recurring revenue.
Results for the quarter ended in May are expected Thursday after the close. Adjusted earnings are expected to rise 13% to $3.78 per share, with revenue up 9% to $4.76 billion.
In September, Adobe announced plans to acquire digital design rival Figma for $20 billion. But the deal is in the crosshairs of regulators, including the US Department of Justice, due to antitrust concerns.
Like Oracle, Adobe has a consistent track record of annual profit growth. But annual profits are expected to fall 3% this year, with growth picking up 10% in fiscal 2024.
Outside of the tech sector, homebuilders are on a tear. Within the group, results from Lennar (LEN) are due Wednesday after the close.
Revenue growth slowed to a blistering pace when the company reported results in March, up 5% to $6.5 billion. But deliveries rose 9% to 13,659 homes.
Commenting on the results, CEO Stuart Miller said: “Homebuyers are eyeing the possibility that the current interest rate environment will be the new normal. As a result, the housing market continues to evolve as increasing household and family formation continues to drive demand in the face of a chronic shortage of supply. “
Fiscal second-quarter earnings are expected to fall 51% to $2.32 per share, with revenue down 13% to $7.3 billion.
Despite headwinds in the housing market – namely higher interest rates – Lennar stock continues to stick to its 10-week moving average after breaking a cup-and-handle base in April.
Options Trading Strategy
A basic options trading strategy around profits – using call options – allows you to buy a stock at a pre-determined price without taking on much risk. Here’s how the options trading strategy works and what a call options trade for Adobe stock looked like recently.
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First, identify the top rated stocks with a bullish chart. Some might settle into solid foundations at an early stage. Others may have already broken out and are receiving support for their 10 week lines for the first time. And a few might trade tightly near the highs and refuse to give up much ground. Avoid extended stocks that are too far from the appropriate entry points.
In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. A call option contract gives its holder the right to buy 100 shares of a stock at a specified price, called the strike price.
Put options are for low performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the price of the underlying stock. A put option gives its holder the right to sell 100 shares of a stock at a specified price.
You make profits when the stock falls below the strike price with a put option.
Check strike prices
Once you have identified a payout setup for a call option, check strike prices with your online trading platform or at Cboe.com. Make sure the option is liquid, with a relatively tight spread between bid and ask.
Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at that time. In some cases, an in-the-money strike price is acceptable as long as the premium is not too expensive.
Choose an expiration date that matches your risk objective, but keep in mind that time is money in the options market. Short-term expiry dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.
See which stocks are in the ranking portfolio
This options trading strategy allows you to capitalize on a bullish earnings report without taking on too much risk. The risk is equal to the cost of the option. If the stock spreads on profits, the maximum you can lose is the amount paid for the contract.
Adobe stock option trading
Here’s how a recent call options exchange researched Adobe, a liquid name in the options trading market.
When Adobe stock was trading around 435, a monthly in-the-money call option with a strike price of 435 (expiring June 23) carried a premium of around $1,895 per contract. , or nearly 4.4% of the underlying stock price at the time.
One contract gave the holder the right to buy 100 shares of Adobe at 435 per share. The maximum that could be lost was $1,895 – the amount paid for the 100-share contract.
Factoring in the premium paid, Adobe stock would need to rally back past 453.95 for the trade to start making money (strike price of 435 plus premium of $18.95 per contract).
Keep in mind that this is not a trade for a small wallet, as buying 100 shares of Adobe would cost $43,500.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.
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