This morning, we’re recommending a covered call on Adobe Systems, Inc. (NASDAQ:ADBE). We’ve been managing a position in ADBE since our ADBE August 9th $302.50 Put Write expired in the money.
After dropping to support at 2,960 last Tuesday, the S&P 500 has held firm. It didn’t move higher, but it also didn’t moved any lower.
We are expecting more consolidation on Wall Street, which means this is a great time to take advantage of the benefits of selling covered calls.
Covered calls work especially well during periods of consolidation because you can sell a strike price that is closer to the current stock price with less risk of the option will expire in-the-money. That means there’s a greater likelihood you’ll get to keep the entire premium if the option expires out-of-the-money. Then you’ll be able to sell another covered call against the same stock in the future.
Technology stocks, as represented by the Technology Select Sector SPDR Fund (NYSEARCA:XLK), are in a tight range, and we think they’ll continue to consolidate.
Unlike the rest of the sector, ADBE broke out of its technical formation, providing us a good opportunity to take a covered call at a higher strike price while still collecting decent premium.
Getting More Aggressive With a Lower Strike
We’ve been watching ADBE consolidate in a down-trending “wedge” for two months now. Last week, the stock finally broke above the down-trending resistance level that forms the top of that wedge. However, by Friday, the price action completely wiped out those gains and created a bearish engulfing pattern.
We recommend selling a call with the $290 strike price because the bearish movement on the stock chart tells us we can be more aggressive with a lower strike price. When selling this call option, we want to collect as much premium we can. We will have an opportunity to re-evaluate our strike price if we sell another covered call against the stock in a few weeks.
We recommend choosing an expiration date that offers plenty of liquidity. That way we can exit the trade with ease if we want to roll this trade out.