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9:00am (EST)
The Federal Open Market Committee’s (FOMC) sang their same old song and dance on monetary policy as the group left interest rates unchanged at record lows “for an extended period of time” yesterday. There wasn’t much action before the Fed’s policy statement and there was a small battle as the news was being released but the bulls seized control of the situation shortly after the announcement. However, by the closing bell, things were still a toss-up as the bears battled back and took 2-out-of-3 of the major indexes.
As far as the specifics, the Fed said the pace of the recovery will be “modest” over the near-term but said they were willing to spend more money to support a recovery, if needed. They also noted that business spending is picking up, although at a less rapid pace, and admitted the pace of the job recovery has slowed in recent months.
Although we were expecting more fireworks, the Dow managed to close 7 points higher and finished at 10,761. The S&P 500 slipped 3 points to finish at 1,139 while the Nasdaq gave up 6 points to close at 2,349. We will go over the market’s current range in our afternoon update but it’s pretty eerie that Tech closed just a point below our 2,350 target.
The one stock we want to talk about this morning is Adobe Systems (ADBE, $32.94, down $0.17). Yesterday, we said to expect a HUGE move and that we got as shares were crushed in extended trading last night after the company released earnings. Their numbers were great and even their forecast going forward wasn’t that bad, but, the market took it as a negative and reacted harshly which is sweet news for us.
The company reported profits of $230 million, or $0.44 a share, versus $136 million, or $0.26 a share, in the year earlier quarter. Excluding items, Adobe actually earned $0.54 a share which was better than analyst’s estimates of $0.49 a share. Revenue soared over 40% to $990 million which was also better than Wall Street’s target of $985 million.
The problem was Adobe’s forecast for next quarter’s earnings which are expected to come in at $0.48-$0.54 a share on revenue of $950 million to $1 billion. The suit-and-ties are expecting numbers of $0.53 a share on revenue of $1.03 billion. So basically, shares are getting taken to the wood shed because they were $300,000 light on their revenue forecast.
It doesn’t make sense and a lot of traders who went long and strong before the closing bell are going to be taking one on the chin. Adobe made a big jump a few weeks ago, rising from $29.31 to $32.86 after Apple (AAPL, $283.77, up $0.54) announced it would ease restrictions on developing iPad and iPhone applications. This cleared the way for Adobe’ popular Flash software to get back into the mix but that doesn’t matter today.
Shares of Adobe were down over 15%, or $5.14, to $27.81 in after-hours last night and this morning the stock is showing a pre-market bid of $25.99, down $6.95. This means the put options we profiled should move from $1 to $6, or more than 500% this morning.
We were able to get our subscribers into a strangle option trade on Adobe on Monday and it should be a great win as the put options are going to explode at the open. These types of option trades (strangles and straddles) have been golden in this type of market environment and they help take some of the risk out that is involved with directional trading.
We have been profiling a lot of these trades because lately and they are easy to do. Although many beginning option investors get confused on buying a call AND put option on a stock, we wanted to start doing these trades because they can make you some serious returns. The beauty of these trades is that it is also possible to make money on BOTH sides if the stock is really volatile or enough on one side of the trade if the stock makes a big move.
Normally, a strangle/straddle option trade can easily get you returns of 10%-20% but some can gain a lot more even if one side of the trade loses 100%. If a stock moves just 5% it can mean a 100% return on the right option. A 10% move in a stock might make you 200% and a 15% pop in a stock could bank you upwards of 300% on a call or put option so see, sometimes it doesn’t matter if you lose 100% on one side of the trade.
That is what we are hoping for Adobe this morning and once the trade is over we will cover it in more detail and show you exactly what we are talking about. We wanted to go over these types of trades because our “motto” was that we only did directional trading. Well, we caught a lot of grief when we started to profile these “new” option trades but they are really simple folks and they offer protection.
We try to target a return of 100% for all of our trades and we will continue to do so. However, please realize strangle/straddle option trades offer just as much potential but they also offer protection. If you are having trouble understanding them or want more information, email us. That is what we are here for.
We didn’t mean to be long winded this morning but there is a method to our madness. All markets are different and our goal is to make you money no matter what environment we are in. Sometimes that means change but change is good which is why we are covering these and all types of option trades that we think can make you some cash. Covered calls, covered puts, debit/ credit spreads and strangle/ straddle option trades may take a little more monitoring but they are easy strategies.
We recently profiled a Dendreon (DNDN, $42.52, up $0.22) covered call option trade that is on track to return us 11% in a month if things play out like we have planned. Do the math on making 10% a month and you will be happy in a year.
In any event, please remember we are always here to answer your questions and we usually respond to emails within 24 hours or less so you will get a quick response from us if you still are unsure on how these trades work.
As we head to press, Dow futures are down 21 points to 10,673 while the S&P 500 futures are lower by 3 points and are at 1,132. The Nasdaq 100 futures are getting punished for a 7 point loss to 1,978. Subscribers, check the Members Area for the explicit instructions on what to expect at the open for Adobe.
Tags: AAPL, ADBE, ADBE earnings, Adobe Systems, dndn, explain the concept of options, momentum options trading, option picks, option trading blog
