EOT Trade Alert – September 29, 2010

Corey Williams | September 29, 2010

September 29, 2010

Trade Alert:

Buy ADBE Jan 2011 $27 Calls at $1.80 or better

Company Background:

Adobe Systems (ADBE) is one of the world’s largest software companies. They make several widely used software products like Acrobat, Illustrator, and Photoshop.

Short-Term Catalyst:

A weaker than expected outlook took the wind out of ADBE’s sails last week. With the stock down big, I see an opportunity.

Let’s take a closer look…

Expectations for ADBE and software companies in general have gotten a little too bullish lately. When analysts get overly bullish, it makes it tough for companies to keep up with expectations.

So last Wednesday when the company reported earnings, the company issued guidance below expectations and the stock plunged.

I think the outlook management issued was a well timed attempt to manage expectations, especially in light of the growing uncertainty surrounding the strength of the economic recovery.

Look, the last thing management wants is overly bullish estimates in an unpredictable economy.

But I think the selloff has been overdone. Now ADBE looks undervalued to me.

Just look at revenue and earnings. They’re both on the upswing.

Last quarter revenue was $990.3 million, up from $697.5 million last year. And earnings were up to $0.54 a share from $0.26 last year. Clearly these are very bullish trends.

I think ADBE will snap back from this knee-jerk selloff and rally to close out the year.

On a technical basis, ADBE is just above a key support zone. The last two times ADBE fell to around $26, bulls stepped in and sent shares skyrocketing over the next few months. I think we’ll see a similar reaction this time around.

Let’s grab these undervalued call options on a leading software company now!

Trade Details:

Underlying Stock Symbol:	ADBE
Current Bid-Ask Price:	$1.67 – $1.70
Option “Buy Up To” Price:	$1.80
Break-Even On Stock At Expiration:	$28.80
Maximum Risk Per Contract:	$180

Exit Strategy:

ADBE is trading at $26.28 per share. Resistance levels will be at $30.50 and again at $33.50. Remember, we want this stock to move higher. Support levels will be at $25 and $22.50. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

Chart: