by First-quarter earnings season is upon us, but some tech heavyweights are on the calendar, including Adobe (ADBE). Adobe stock broke through the 400 mark in a big way last month. Adobe stock Friday surpassed a long cup base that started in mid-August.
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Software stocks sold hard Wednesday, including Adobe, which fell 3.4% on strong volume. But ADBE remained above its 10-day moving average. Shares rallied sharply on Thursday after the company launched a new platform for its Firefly generative AI model for enterprise clients, allowing users to generate images from text-based descriptions.
Shares rose again early Friday after Wells Fargo upgraded Adobe stock to overweight with a price target of 525. Mizuho increased ADBE's price target to 450 from 375.
oracle (ORCL) meanwhile continues to show relative strength after managing a break above the 91.22 entry in late March. ORCL stock has made excellent progress since then, finding support at the 21-day exponential moving average.
Oracle's results will be released after the market close on Monday. Zacks' consensus estimate is for adjusted earnings per share of $1.58, up 3% year over year. Revenue is expected to increase 16% to $3.74 billion. That's 18% revenue growth for three consecutive quarters.
Adobe Stock shows bullish development
Adobe's previous two earnings reports lured buyers into the stock. When the company released its results on March 16, shares were up nearly 6% after ADBE reported a 13% rise in quarterly profit and a 9% increase in revenue to $4.66 billion. Revenue in the company's Digital Media segment, which includes Creative Cloud, was $3.4 billion, up 9%.
With $11.6 billion in annual recurring revenue, Creative Cloud accounted for the bulk of Adobe's revenue in fiscal 2022.
Results for the quarter ended May are expected on Thursday after market close. Adjusted earnings are expected to rise 13% to $3.78 per share and revenue to rise 9% to $4.76 billion.
In September, Adobe announced plans to acquire digital design competitor Figma for $20 billion. But the deal is in the crosshairs of regulators, including the US Department of Justice, due to antitrust concerns.
Adobe, like Oracle, has a consistent track record of annual earnings growth. However, annual earnings are expected to fall 3% this year, with growth picking up again at 10% in fiscal 2024.
Outside of the tech sector, home builders have been in overdrive. Within the group, results emerge from lennar (LEN) are due on Wednesday after market close.
When the company reported its results in March, revenue growth slowed and rose 5% to $6.5 billion. But deliveries rose 9% to 13,659 homes.
Commenting on the results, CEO Stuart Miller said: “Homebuyers are considering the possibility that today's interest rate environment could be the new normal. Accordingly, the real estate market continues to change as increasing household and family education further fuels demand in the face of a chronic supply shortage.”
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 — particularly higher interest rates — Lennar stock continues to respect its 10-week moving average after breaking out of a mug with a handle in April.
Options Trading Strategy
A basic strategy for profit-seeking options trading — using call options — allows you to buy a stock at a predetermined price without incurring a great deal of risk. Here's how the options trading strategy works and what a recent call option trade looked like for Adobe stock.
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First, identify the stocks with the highest valuation using a bullish chart. Some may already be establishing solid early-stage bases. Others may have already broken out and are finding support at their 10-week moving averages for the first time. And some may trade tight near highs, refusing to give up much ground. Avoid extended holdings that go too far past the right 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 the holder the right to buy 100 shares of a stock at a specified price, called the exercise price.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just under the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.
A put option gives you a profit if the stock falls below the strike price.
Check the strike prices
Once you've determined a yield setup for a call option, check the strike prices on your online trading platform or on Cboe.com. Make sure the option is liquid and has a relatively tight bid/ask spread.
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 relevant underlying share price. In some cases, an in-the-money strike price is fine as long as the premium is not too expensive.
Choose an expiration date that fits your risk objective. However, remember that time is money in the options market. The premiums are cheaper for short-term maturities than for later maturities. Buying time in the options market comes with a higher cost.
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This options trading strategy allows you to capitalize on a bullish earnings report without taking on too much risk. The risk is the cost of the option. If the stock is worse than the earnings, the most you can lose is the amount you paid for the contract.
Adobe Stock options trading
Here's a recent call option trade for Adobe, a liquid name in the options trading market.
When Adobe stock was trading at around 435, an in-the-money monthly call option with a strike price of 435 (expiry on June 23) was at a premium of around $1,895 per contract, or nearly 4.4% of the underlying stock price at that time.
A contract gave the holder the right to buy 100 Adobe shares at a price of 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 surge above 453.95 for the trade to start making money (435 strike price plus $18.95 premium per contract).
Note that this is not a small portfolio trade as it would cost $43,500 to buy 100 shares of Adobe.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insights.
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