ADBE Analysis

Update 12/7/2015: The rolled position, expiring in December, came within two weeks of expiration before returning to profitability, and I have exited the position for an overall profit.

Shares rose b 3.5% over 74 days, or a +17% annual rate. The options position produced a 79.8% yield on debit for a +393% annual rate.

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Update 11/16/2015: ADBE is just beyond the edge of profitability as it nears expiration. A market downturn, which I expect, will return it to profitability. In anticipate of the downturn, I have rolled the position forward to a December expiration and in the process transformed it into a bear call spread.

The November iron condor was exited for a $0.93 debit, and I entered the December bear call spread for a $2.14 credit, so the roll produced a net credit of $1.21. I shall defer calculation of results until entire series is compete.

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The software company Adobe Systems Inc. (ADBE), headquartered in San Jose, California, closed above its 20-day price channel on Wednesday, sending a bull signal with low historical odds of success, suggesting a non-directional trade.

I already hold a non-directional iron condor in connection with ADBE's Sept. 17 earnings announcement, and so I shall consider the symbol as a potential covered call.

[ADBE in Wikipedia]

ADBE

I shall use the NOV series of options, which trades for the last time 57 days hence, on Nov. 20.

Odds

ADBE completed six bull signals in the past year. Only one was successful, yielding 1.9% over 26 days. The five losing signals on average each lost 3.5% over 28 days.

The success rate was 16.7%, suggesting  a non-directional trade, such as an iron condor or a covered call.

Ranges

Click on chart to enlarge.

ADBE at 11:12 a.m. New York time, 30 days hourly bars

Implied volatility stands at 33.7%, which is 1.3 times the VIX, a measure of volatility of the S&P 500 index. ADBE’s volatility stands in the 47th percentile of its annual range.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	95.01	106.17	87.25	N/A
Lower	72.71	61.55	73.44	N/A
Gain/loss	13.3%	26.6%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

ADBE today proved that it is indeed a low-odds bull play. It pulled back sharply from its break above the 20-day price.

Implied volatility is at the wishy-washy spot. The 47th percentile is neither high nor low in any meaningful sense.

I'd prefer a lower percentile for covered call position, so I'll look at ADBE as an iron condor.

The grid is a bit difficult to work with because large gaps from strike to strike in the probability of options expiring out of the money for maximum profit. For calls, the steps are 75.5% and 89.1%. I normally look for about 80%. For puts, the steps are more usable: 72.5% and 79.1%.

As a result of the grid structure, the iron condor gets shifted to the downside. This is not necessarily a bad thing, since ADBE gave a bull signal and is prone to whipsaws, which means a downward move.

In any case, the significant part of the one standard deviation range on the upside is beyond the profit zone.

Iron condor, short the $90 calls and long the $95 calls,
short the $72.50 puts and long the $70 puts,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money

NOV	Strike	OTM
Upper	90	75.5%
Lower	72.5	84%

The premium is $1.06, which is 28% of the average width of the position’s wings.The stock at the time of entry was priced at $83.93.

The risk/reward ratio is 3.7:1.

Decision for My Account

I've opened an additional iron condor on ADBE as described above. In calculating results, shall treat it as a separate trade form my October position entered just before earnings.

-- Tim Bovee, Portland, Oregon, Sept. 24, 2015

References

My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.