I have followed Adobe Systems (NASDAQ:ADBE) for several years, and up until now it has been one of the names I have been more successful at timing. Much of last year I owned call options in anticipation of the Creative Suite upgrade. Since December, I have been on the sidelines expecting a 20% pullback that frequently occurs over the months following such a release.
Then in June I said,
The high current expectations may be the catalyst I need for my prediction to come true, which in turn would hopefully create an opportunity for me to buy the stock again. My ideal entry point would be $37.50, but anything below $40 might be interesting given the current earnings estimates.
The stock is now trading at approximately $39, a multiple of 26x expected FY (November) 2007 earnings, and 23x 2008 estimates, which is getting toward the low end of the long-term trading range. And while it is still only in the “might be interesting” price range I did find it interesting enough to make a small bet this morning.
I sold September $37.50 put options for $1.25 each, which will require me to buy the stock for $37.50 in September if the stock is below that price. I won’t mind, since I considered $37.50 an ideal entry point anyway, and the option premium would make my effective price just $36.25 - giving me a cushion against any further downward pressure (though if the stock falls to $20 for whatever reason I will still be down a bunch). On the other hand, if the stock never reaches my entry point I will get to keep the premium - a 3% return on my money at risk for a holding period of about 6 weeks - which isn’t a bad alternative.
Disclosure: The author currently has a short position in put options related to Adobe systems. If the stock is below $37.50 when the options expire in September, he will be forced to buy shares at that price.
ADBE 1-yr chart: