Today’s trade is a bet on stocks making a run back towards all-time highs over the next 3-6 months. If you don’t believe that’s in the cards for stocks, then this trade isn’t for you.
Unfortunately, its also a trade in a stock with a high trading price, so the margin requirement may perhaps be a bit onerous for some.
If you’re in either camp, there’s no shame in skipping this trade. It’s not for everyone.
If I haven’t scared you off yet, then keep reading…
Here’s a chart of Adobe $ADBE:
The Analysts here like this name.
The thinking here is if stocks are going to rip back to all-time highs over the next 3-6 months, Adobe is one of those names from a leading sector that will be one of the names that gets us there.
The extra layer of thinking that I bring to the trade is that if we’re early, I’d like to minimize my losses. In this case, a bullish risk reversal spread, in which we use short puts to pay for the cost of the calls we wish to be long, feels like the right move.
Here’s the Play:
I like entering an $ADBE June 460/700 Bullish Risk Reversal for a net credit in the neighborhood of $1.00. I’m not too concerned about getting a perfect price. My main concern is simply collecting a small credit to take the risk.
Due to the high price of the underlying stock, the margin required to hold this trade, even a 1-lot trade, is not insignificant. My broker is requiring me to hold around $6,600 of initial margin. So for this reason, this trade might not be for everyone. I’ll be trading a 1-lot.
Due to the naked short puts risk, I’ll be very aggressive with my risk management. Any $ADBE closing price below $500 per share is my signal to get out, whatever it costs.
But as long as the $500 level holds, then the worst-case scenario for us is that both options expire worthless and we are left keeping the initial credit we received today.
I’ll take profits if/when $ADBE hits $700 per share. How much that profit is will depend on how soon we get there. The sooner, the better. $700 seems far away, because it is, but this is a bet on the bull market resuming and if it does, we believe $ADBE will be one of the leaders.
If you have any questions on this trade, please send them here.
If you missed last week’s video Jam Session, you can catch a replay on Stock Market TV.
P.S. We do trades like this regularly. If you’d like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.
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