Adobe Systems (ADBE) stock was a bearish candidate that came up on one of my screeners for being rated a 100% Sell with a Strengthening short term outlook on maintaining the current direction.
Today, we’re going to look at a Bear Put spread trade that assumes Adobe will continue to drop over the next few months.
A Bear Put spread is a bearish trade that also benefits from a rise in implied volatility.
The maximum risk for a Bear Put spread is limited to the premium paid while the maximum potential profit is also capped.
The maximum profit is equal to the width between the strikes less the premium paid.
ADOBE SYSTEMS BEAR CALL SPREAD
To create a Bear Put spread, we buy an out-of-the-money put and then sell another put further out-of-the-money.
Buying the May 15th put with a strike price of $240 and selling the $230 put would create a Bear Put spread.
This spread was trading for around $3.80 on Friday. That means a trader buying this spread would pay $380 in option premium and would have a maximum profit of $620.
That represents a 163.16% return on risk between now and May 15th if ADBE stock falls below $230.
If Adobe stock closes above $240 on the expiration date the trade loses the full $380.
The breakeven point for the Bear Put spread is $236.20 which is calculated as $240 minus the $3.80 option premium per contract.
COMPANY DETAILS
The Barchart Technical Opinion rating is a 100% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Relative Strength is below 30%. The market is in oversold territory. Watch for a potential trend reversal.
Adobe Inc. is one of the largest software companies in the world.
Adobe picks up licensing fees from customers, which form the bulk of its revenue.
The company also offers technical support and education, which account for the balance. The company operates through three segments.
The Digital Media solutions segment enables small businesses and enterprises to create highly compelling content, deliver it across diverse media through smartphones, tablets, e-readers, and other devices, and then optimize it through systematic targeting and measurement.
Within Digital Media, the two major components of revenue are the Creative family of products and Document Services products.
The target customers are traditional content creators, web application developers, digital media professionals and user interface designers/developers, writers, videographers and photographers.
Conclusion And Risk Management
One way to set a stop loss for a Bear Put spread is based on the premium paid. In this case, we paid $380 , so we could set a stop loss equal to the 50% of the premium paid, or a loss of around $190.
Another stop loss level could be if the stock broke above $285.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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