Analyst: ADBE should be a FANG stock
Software giant Adobe Systems Incorporated (NASDAQ:ADBE) has been a consistent outperformer in 2017. So much so, in fact, that BofA-Merrill Lynch added the tech stock and its sector peer Broadcom Ltd. (NASDAQ:AVGO) to the the popular Wall Street acronym "FANG," declaring it now "FAAANG." The exclusive club -- first christened by CNBC's Jim Cramer -- originally consisted of Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL), with some traders adding Apple (AAPL) to make it "FAANG." Below, we will examine how options traders are playing ADBE stock -- which could be flashing "buy."
Adobe Systems stock has added 44% year-to-date -- better than most FAANG stocks -- and touched a record high of $157.89 on Sept. 11. However, the equity gapped lower after Adobe reported earnings on Sept. 20, but is now within one standard deviation of its 120-day moving average. According to Schaeffer's Quantitative Analyst Chris Prybal, this is a historically bullish signal.
Previous pullbacks to this trendline over the past seven years have yielded an average two-month return of 6.6%, with ADBE stock higher nearly 77% of the time. Going out to three months after a pullback, ADBE averaged a return of 10.3%, and was higher a whopping 93.3% of the time. With Adobe stock last seen at $148.34, another similar three-month rally would it trading around $163.62 -- re-entering record-high territory, and a shade below the stock's average price target of $164.30.
In the options pits, there has been a steady preference toward calls. The October 167.50 call has seen the largest increase in open interest in the past 10 days, and is now home to peak open interest of more than 7,500 contracts. The closer-to-the-money October 150 call has seen nearly 5,600 contracts added in the past two weeks, and now harbors close to 7,400 contracts outstanding.
Nevertheless, ADBE's 30-day implied volatility skew of 8.4% is just 14 percentage points from an annual high, meaning near-term calls are much less expensive than normal, compared to puts. Plus, those looking to bet on ADBE's near-term trajectory with options are in luck, if past is prologue. Adobe Systems stock has consistently rewarded premium buyers over the past year, per its Schaeffer's Volatility Scorecard (SVS) of 82. In other words, ADBE has tended to make outsized moves on the charts, relative to what the options market has priced in.