What if we told you that Adobe (NASDAQ: ADBE) stock is setting itself up for a huge gain opportunity? Adobe is set to report earnings on June 12, and if you’re the kind of investor who likes to play short-term volatility with defined risk, there’s an intriguing opportunity brewing.
Let’s get right to it: Buying 2% out of the money put options one day before Adobe’s earnings might not be a bad trade.
While these are short-term opportunities that emerge from time to time, real wealth is created by compounding money over the long-term. That’s exactly what the Trefis High Quality (HQ) Portfolio is designed for, and has returned >91% since inception, outperforming S&P 500, Dow, and Nasdaq, all of them.
Let’s dig into details of what makes the Adobe trade worth your attention.
The Numbers Make The Case
Over the past 5 years, Adobe has reported 20 earnings. What happened next?
- 14 out of 20 earnings events led to a negative return the very next day.
- Only 6 earnings saw Adobe stock rise in that immediate 1-day window.
- When it rose, the median gain was just +3.9%.
- But when it dropped, the median decline was a sharp -7.4%.
High likelihood of dropping combined with high magnitude of drop when it happens – that’s where the value is!
That’s a pretty clear historical skew: Adobe’s earnings tend to disappoint the market – or at least trigger short-term selling pressure more often than not.
Risk-Reward: Tilted in Your Favor
Let’s break the trade down with a concrete scenario:
- You could buy a put option that’s 2% out of the money, with 1 week until expiration.
- As of last Friday, such a put option cost about $12.50.
- If Adobe drops by 7% post-earnings (well within its historical norm), that option could easily jump 1.5x in value.
- On the flip side, if the stock rises, that same put might lose most of its value -but your loss is capped at about $12.50. And that, too, if you hold the put till expiry. If you square off as soon as the expected result does not materialize, you could further limit your losses.
In short: Limited downside, meaningful upside. And that’s the essence of why this trade stands out: You’re leveraging historical probability, tapping into short-term volatility, and doing so with defined risk.
Of Course, There Is Risk
Let’s be clear: This is not a sure thing.
- Adobe might deliver a strong beat and surge.
- Or the market might just shrug off any disappointment.
- Option premiums already bake in some expectations of volatility – so even a modest drop might not pay off big.
Another risk is the stock dropped more than 10% with March earnings, and its possible all the downside is priced in.
But here’s the key: The potential loss is known. The upside, if history rhymes, could be substantial.
The win rate historically favors a drop.
Bottom Line
If you’re comfortable with short-term options trading and want to play the odds, Adobe’s earnings on June 12 may be worth circling on your calendar. Historical data, skewed returns, and attractive option pricing combine to create a rare risk-reward opportunity.
Just remember: trade small, stay smart, and know what you’re risking. Adobe’s historical post-earnings reaction is an example of short-term volatility in the market, which is not uncommon, and is often challenging to navigate. However, long-term outperformance is hopefully what matters to you. If so, consider investing in the Trefis High Quality (HQ) Portfolio, which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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