A ‘butterfly’ options spread trade that pays off if there’s an earnings-driven rally in Adobe

As investors become more sensitive to the size of capex spending by technology firms to chase artificial intelligence dominance, Adobe (ADBE) stands out as a company that already generates revenue from their image generation AI models. With earnings on deck after the close Thursday, this continued demand for Adobe’s AI tools positions the company for further growth, especially as digital content creation becomes prominent across industries. The company’s innovation pipeline provide long-term growth potential, with the earnings event likely serving as a catalyst for further upside. ADBE is trading just above its $570 support/resistance zone. ADBE has tested this level multiple times over the past year, and a break above this resistance could signal a potential rally towards the $640 price target — which represents a historical high. If earnings surprise to the upside, we expect the stock to break out above $570 and continue its upward trend. ADBE remains a highly profitable company with an industry leading net margin of 25%. While its forward P/E ratio of 28 is elevated compared to industry peers, the company’s growth projections help justify the premium valuation. With expected EPS growth of 14% and revenue growth of 11%, Adobe maintain its leadership in the software industry. This is further supported by strong profitability metrics, such as a gross margin of 88%, that continue to outshine industry averages. To capitalize on the potential for an earnings-driven rally, we suggest using a “broken wing butterfly,” which offers a high reward-to-risk ratio. Specifically, I suggest the ADBE Sep 20, 2024 $585/630/650 Call butterfly at $10.96 Debit. This strategy entails: • Buying the Sep 20 $585 Calls @ $18.80 • Selling the Sep 20 $630 Calls (2 contracts) @ $5.53 • Buying the Sep 20 $650 Calls @ $3.22 This butterfly strategy offers a maximum reward of $3,404 per contract while limiting risk to only $1,096 per contract. The breakeven is $595.96, and this structure allows you to profit if Adobe rallies towards $630 after earnings. DISCLOSURES: (ADBE position) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.