Adobe (NASDAQ: ADBE) options action shows bullishness

Heavy Adobe Systems Inc. (NASDAQ: ADBE) options volume changed hands during afternoon trading on Friday thanks to an investor who sold puts and bought calls in a later-dated risk reversal.

ADBE shares are currently trading down $1.03, or nearly 3%, on the day to $34.72. The company did not announce any news today that could have put pressure on the shares, but the rest of the software sector declined on the day as well. ADBE is due to announce earnings on March 23 after the market closes, and analysts estimate earnings of 37 cents a share.

Around 2:15 p.m. EST, 13,000 July 32-37 risk reversals, also referred to as a synthetic long stock (split strikes), hit the tape. The options action suggests an investor bought the July 37-strike calls for $1.20 per contract and sold the July 32-strike puts for $1.13 per contract to pay seven cents per spread. This strategy simulates a long position, but investors do not put as much capital toward this position as buying calls would require. If the stock climbs higher than $37.07 a share (the breakeven price), then investors could make unlimited profits on this trade. On the other hand, if ADBE shares drop below $32.07, investors start losing money. If ADBE shares close between $37.07 and $32.07, the investor loses the premium paid, or seven cents per spread.

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Implied volatility of the July 32 puts is 29% while the July 37 calls have an implied volatility of 26%, compared to a 30-day historical volatility of 23%. The calls dropped 50 cents on the day, and the puts gained 22 cents during Friday’s session. It’s also important to keep in mind that while this action suggests bullishness, the investor could be short ADBE shares and hedging that position by trading this inexpensive spread.