Position Trading Update

In the HX Income strategy, we seek to generate income by selling put options in companies with excellent track records and where we see an opportunity.

The “opportunity” is that the stock has stumbled for some reason that we believe it is not sustainable.

Remember, when you sell a put option, you collect the “premium.” That is essentially like an insurance premium.

Someone else is paying for the right to sell the shares at a specific price. If the stock goes down, that price limits its downside.

You keep the premium if the stock is above that price when the option expires.

However, if the stock is below that price, you, as the seller of the put option, are obligated to buy the shares.

This is an obvious “risk” to the strategy - that you will end up having to buy a stock, and potentially, it will be trading at a level below what you paid for it. This means you may have a loss.

We take this risk into account when we recommend ideas at HX Income; it is part of our process. We only recommend companies that we believe we would WANT to own at that lower price.

Today, we are likely to see one of those situations.

Leading SaaS software company Adobe Inc. (NASDAQ: ADBE) reported earnings yesterday after the stock market closed, and a portion of the report disappointed investors. We will talk about the report more below.

Right now, before the market opens, the stock is indicated to open down a little more than 10% or between $500 and $510 per share.

Today - March 15 - is also options expirations day.

We have previously recommended that readers sell the March $535 puts.

We don’t know where the stock will end up on the day, and it may end up higher than the $535 level. If it does, you don’t need to do anything, and you will simply keep the income that came into your account from selling the option.

However, if it does finish below that level, you will buy the stock at $535 per share.

Based on the closing prices of the days we made the recommendations - February 20 and March 4—the put options could have been sold for $21.61 and $9.11.

This means your effective price of owning ADBE stock would be $513.39 and $525.89, respectively.

If the stock finishes above those levels, you can sell the stock and will have a gain. You lose money selling the stock you bought, but the income from selling the put more than offsets it.

If the stock finishes below those levels, then the position will be (for now) at a loss.

If this happens, we recommend that investors stick with the position.

As we said above, we consider this possibility and only recommend stocks we would absolutely want to own if they fell to these prices.

This is precisely what is happening with ADBE.

What happened in the quarter?

They beat on the report. The company reported revenue of $5.18 billion and an EPS of $4.48, versus expectations of $5.14 billion and an EPS of $4.38.

The issue is their guidance for the next quarter. They gave EPS guidance that was in line with higher expectations, but their revenue guidance was “$5.25 billion to $5.3 billion” versus the analyst expectation of $5.31 billion. This was a mild disappointment.

They also expect $440 million in new recurring “creative business” below the $459 million analyst expectation. This is a business line that is closely followed for future growth.

If the stock opens where indicated, the company will lose $25 billion of market cap due to a disappointment of $100 million (maybe) in total revenue and $19 million in this business line.

Finally, the company also announced a $25 billion stock buyback. This is 10% of the market cap and, coincidentally, the exact amount that the stock is indicated down.

Does this make sense? If the stock trades there, it does, but we have seen this situation MANY times before.

You have a company growing nicely, beating expectations, but it has been up a lot in the last year (+60% for ADBE) and in a nervous stock market. This leaves the stock vulnerable to any disappointment.

We LOVE these situations. They are some of the best trading opportunities we see.

As a result, we are sticking with our recommendation. We are happy to own the shares at the prices involved in the pre-market indications.

We believe the shares will rebound, and we will book profits based on these recommendations.