We’ve come to the end of another week in the markets. Things were mixed over the past five days. While the S&P 500 hit a record high on Tuesday, it’s primarily struggled in the days since. As I write this midday Friday, the index is down nearly three-quarters of a percent.
Adobe (ADBE) is leading the retreat, down 14% on the day, after it provided a weak forecast for the second quarter. While it managed to beat analyst estimates for both earnings and revenues, it also said that its net new annual recurring revenue from its digital media segment would be $440 million, $30 million less than Q2 2023, suggesting its AI initiatives aren’t gaining enough traction with its creative customers.
Well, that’s something to ponder over the weekend.
However, for now, I want to provide investors with three unusually active put options to sell to cover your St. Paddy’s expenses on the weekend. Here goes.
Happy St. Paddy’s Day Weekend!
Adobe
Usually, when I write about unusual options activity, I use the previous day’s activity to find my stocks of interest. I’m not diverting from this format. However, when you look at Adobe’s two put options from Thursday’s trading with Vol/OI ratios higher than 1.25, you’ll see they were for strike prices of $500 and $575. As I write this, its share price is just $488.
So, yesterday, the April 19 $575 put was about $5 in the money, while the March 22 $500, was about $70 out of the money. If you sold the latter for income, your annualized yield based on a closing price of $570.45 would have been 26%. That would have been fine if it didn’t provide iffy guidance.
Today, the $500 strike has a bid price of $15.95, so unless the shares can rebound back over $500 in next week’s trading, the risk doesn’t fit the reward.
I like Adobe’s business. It continues to evolve in its quest to help creative types produce compelling content. AI is another aspect of this strategy. It’s still early in the game, but it will figure it out.
It will be interesting to see if analysts do anything about the meek forecast. According to Barchart.com’s analyst ratings, of the 30 covering ADBE stock, 23 rate it a Moderate or Strong Buy (4.43 out of 5) with a $651.07 target price.
CNBC quoted Bank of America analysts in a Friday article.
“‘No change to our view that Adobe is a major AI beneficiary,’ the analysts wrote in an investor note Thursday. ‘While the monetization ramp is slower than anticipated, Firefly is one of the [most] widely used generative AI offerings, with potential for multiple paths to monetization,’” CNBC reported.
This drop presents a buying opportunity. It has traded this low in eight months, so you should check out the calls in the weeks ahead.
In the meantime, if you look at the July 19 $430 put, which is about $58 out of the money, the bid price is $12.85, good for a 7.8% annualized yield. You’re not going to get rich off it, but I don’t see its share price falling to $430 or below on this guidance.
If you’re aggressive, the $470 strike on the same July 19 expiry has a $26.05 bid for a 16% annualized yield. The Vol/OI ratio is 7.7, so somebody’s sniffing around.
Vertiv Holdings
Analysts highly rate Vertiv Holdings (VRT). Of the 10 covering it, nine rate it a Strong Buy (4.80 out of 5). The target price is $65.56, about 12% below where it’s currently trading.
I know what you’re thinking. Why would I be excited about an option for a stock that analysts believe is overpriced? That's a good point. In my experience, analysts are often late to the party.
Vertiv’s products include uninterruptible power sources, DC power systems, cooling solutions, and IT infrastructure solutions. All of them are focused on helping data centers and other critical infrastructure assets keep operating. With AI usage accelerating at a blistering pace, its products will remain heavily in demand.
Its shares are up 64% in 2024 and 462% over the past year for a reason.
In 2023, it had revenue of $6.86 billion, 21% higher than in 2022, with an operating profit of $872 million, nearly four times its operating profit in 2022. In 2024, it’s calling for 10% sales growth and operating profits of $1.3 billion, 49% higher than in 2024.
There’s no question its shares aren’t cheap -- they trade for more than four times sales and 29 times cash flow -- but it seems like it’s being conservative about its 2024 estimate.
Only one unusually active put option to sell was available on Thursday. It was the March 22 $67 strike, about $7 out of the money with a week until expiration. The $0.45 bid price has an annualized yield of 31%.
The Barchart Technical Opinion is a Strong Buy, suggesting that your premium income should be safe over the next week.
MicroStrategy
MicroStrategy's (MSTR) primary business is business intelligence software and data analytics. With AI gaining ground, its business model is a double-edged sword. On the one hand, businesses will be more likely to consider big data analytics as part of their decision-making process in the future. On the other hand, AI should level the playing field for competitors and would-be competitors.
It’s probably better known for owning a boatload of Bitcoin. It recently bought a bunch more.
On March 11, it closed the sale of $800 million in 0.625% convertible senior notes due in 2030. These notes can be converted into common shares at $1,497.80, which is already in the money. On March 15, it priced $525 million in 0.875% convertible senior notes due in 2031. These notes have a conversion price of $2,327.21, which is out of the money. It will use these proceeds to buy more Bitcoin.
Its shares are up nearly 147% in 2024, almost triple the price of Bitcoin. It’s like Bitcoin with fundamentals you can study and make an informed decision about its business.
Before the sale of convertible notes, MicroStrategy owned 205,000 Bitcoin. With the approximately $1.1 billion in net proceeds, it could buy another 15-16,000 with $70,000 a coin.
CEO Michael Saylor thinks Bitcoin will “eat gold” in the future. If he’s right, your MSTR stock will be worth much more than $1,700.
So, the put in question from Wednesday is the March 22 $1,000 strike. It had a $5.25 bid price for an annualized yield of nearly 16%. Yesterday’s closing price was $1,676.85. The Vol/OI ratio wasn’t crazy busy at 1.72.
Because it’s tied to Bitcoin, there is a risk that its share price could fall 20% or more in a single day should Bitcoin continue to correct into the low $60,000s or even $50,000s.
I don’t see it falling to $1,000 by next Friday.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
