Built-In 53.8% Profit Potential for Adobe Trade

June 29^th, 2021

Built-In 53.8% Profit Potential for Adobe Trade

Dear Reader,

Yesterday, we looked at a Daily Price Chart of the iShares U.S. Aerospace & Defense ETF, noting that the ETF’s 50-Day EMA is trading above the 100-Day EMA.

For today’s Trade of the Day e-letter we will be looking at a Moving Average Convergence/ Divergence (MACD) chart for Adobe Systems, Inc. stock symbol: ADBE.

Before breaking down ADBE’s MACD chart let’s first review what products and services the company offers.

Adobe Inc. operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, teams, and enterprises to create, publish, promote, and monetize their digital content. Its flagship product is Creative Cloud, a subscription service that allows customer to download and access the latest versions of its creative products.

MACD Indicator confirms Price Momentum

The ADBE daily price chart below shows that ADBE is in a price uptrend as the 12/26 day MACD line (black line) is above the 9-Day EMA (purple line). The Moving Average Convergence/ Divergence chart is shown below the daily price chart.

MACD uses moving averages to create a momentum indicator by subtracting the longer-term moving average from the shorter-term moving average. The MACD is calculated by subtracting a stock’s longer term 26-Day Exponential Moving Average (EMA) from its shorter term 12-Day EMA. This creates the MACD line.

MACD ‘Buy’ Signal

The 9-Day EMA line functions as a buy/sell ‘trigger’. When the 12/26 Day MACD line crosses above the 9-Day EMA line it indicates positive momentum and higher prices for the stock. When the 12/26 Day MACD lines crosses below the 9-Day EMA it indicates negative momentum and lower prices for the stock. MACD is more of a leading indicator than a moving average cross over which tends to lag price movement.

MACD Histogram shows Acceleration of Momentum

Also included in a MACD chart is the histogram bar graph. This portion of the chart helps to illustrate the distance between the 12/26 Day MACD and the 9-Day EMA.

When a crossover initially occurs, the histogram’s bar will be near flat as the two indicator lines have converged. As the lines begin to separate, the bars grow in height, indicating a widening gap and acceleration for the stock’s momentum. When the histogram’s bars begin to shrink this indicates a narrowing of the gap between the 12/26 Day MACD and the 9-Day EMA and a slowing of the stock’s momentum. When the gap between the two indicators begins to narrow, this typically indicates a crossover of the indicator lines could happen soon.

Buy ADBE Stock

As long as the 12/26 Day MACD line remains above the 9-Day EMA, the stock is more likely to keep trading at new highs in the coming days and weeks.

Since ADBE’s bullish run is likely to continue, the stock should be purchased.

Our initial price target for ADBE stock is 632.00 per share.

Profit if ADBE is Up, Down or Flat

Now, since ADBE’s 12/26 Day MACD is currently trading above the 9-Day EMA and will likely rally from here, let’s use the Hughes Optioneering calculator to look at the potential returns for an ADBE call option spread.

The Call Option Spread Calculator will calculate the profit/loss potential for a call option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 7.5% increase to a 7.5% decrease in ADBE stock at option expiration.

The goal of this example is to demonstrate the ‘built in’ profit potential for option spreads and the ability of spreads to profit if the underlying stock is up, down or flat at option expiration. Out of fairness to our paid option service subscribers we don’t list the option strike prices used in the profit/loss calculation.

The prices and returns represented below were calculated based on the current stock and option pricing for ADBE on 6/28/2021 before commissions.

Built in Profit Potential

For this option spread, the calculator analysis below reveals the cost of the spread is $325 (circled). The maximum risk for an option spread is the cost of the spread.

The analysis reveals that if ADBE stock is flat or up at all at expiration the spread will realize a 53.8% return (circled).

And if ADBE stock decreases 7.5% at option expiration, the option spread would make a 42.8% return (circled).

Due to option pricing characteristics, this option spread has a ‘built in’ 53.8% profit potential when the trade was initiated.

Option spread trades can result in a higher percentage of winning trades compared to a directional option trade if you can profit when the underlying stock/ETF is up, down or flat.

A higher percentage of winning trades can give you the discipline needed to become a successful trader.

The Hughes Optioneering Team is here to help you identify winning trades just like this one.

Interested in accessing the Optioneering Calculators? Join one of Chuck's Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

Trade High Priced Stocks for $350 With Less Risk

One of the big advantages to trading option spreads is that spreads allow you to trade high price stocks like Amazon, Google, or Netflix for as little as $350. With an option spread you can control 100 shares of Google for $350. If you were to purchase 100 shares of Google at current prices it would cost about $245,000. With the stock purchase you are risking $245,000 but with a Google option spread that costs $350 your maximum risk is $350 so your dollar risk is lower with option spreads compared to stock purchases.

Get Chuck's Trades Sent to You!

Do you want to start receiving hand-picked trades from 10-Time Trading Champion, Chuck Hughes?

As a Trade of the Day subscriber, Chuck is offering you a special discount on his Weekly Option Alert Trading Service.

Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join and use the code "Optioneering VIP" to receive special pricing!

Wishing You the Best in Investing Success,

Chuck Huges Signature

Chuck Hughes

Editor, Trade of the Day

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Built-In 53.8% Profit Potential for Adobe Trade

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