Will Adobe Systems Incorporated (ADBE) Burn the Bears?

Adobe Systems Incorporated (ADBE) has been moving higher since reclaiming a key trendline

by Kirra Fedyszyn

Published on Mar 11, 2016 at 12:38 PM
Updated on Mar 11, 2016 at 12:44 PM

Software interest Adobe Systems Incorporated (NASDAQ:ADBE) is down 8.5% in 2016, after hitting a post-earnings all-time high of $96.42 in December. The stock took a dive in early February due to ugly guidance from a sector peer, but has since been on the road to recovery, and is trading 1.4% higher at $86.00 today. During its recent trek higher, ADBE climbed back atop its 320-day moving average -- a feat that could have positive implications for the shares going forward.

The past two times ADBE bounced off this moving average, the stock was positive 100% of the time five days later, with an average return of 5.3%, according to Schaeffer's Senior Quantitative Analyst Rocky White. After 21 days, ADBE generated an average return of 15.7%, and was positive each time. The stock's current action echoes this trend -- the shares rallied off their 320-day moving average about three weeks ago, and are up more than 6% since then.

160311ADBE2

Analysts largely appear to be in ADBE's corner already, with nine rating the security a "buy" or better, compared to four "holds," and not a single "sell." However, short interest on ADBE shot up by 62.7% during the two most recent reporting periods -- though these bearish bets still account for only 1.4% of the stock's available float.

Looking to the options pits, traders have bought to open more than three ADBE puts for each call over the past 10 sessions on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Moreover, the resulting 10-day put/call volume ratio is higher than 98% of comparable readings taken in the past year. In other words, option traders are initiating bearish bets over bullish at a faster-than-usual clip ahead of Adobe's turn in the earnings confessional next Thursday, March 17.

In the front-month series, peak put open interest rests at the out-of-the-money March 82.50 strike, with nearly 6,350 contracts in residence. This accumulation of underfoot puts could translate into options-related support over the next week, should ADBE pull back.

But near-term speculators may be paying a hefty price to place pre-earnings bets on ADBE. The stock's Schaeffer's Volatility Index (SVI) of 72% is higher than 94% of all readings in the last 12 months. Furthermore, its Schaeffer's Volatility Scorecard (SVS) of 9 suggests that Adobe Systems Incorporated (NASDAQ:ADBE) has tended to make undersized moves over the past year, compared to what the options market has priced in. Should the stock follow its historical trend higher in coming days -- perhaps in the wake of another blowout earnings report -- recent put buyers may be wishing they had stayed on the sidelines.


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