This languishing software giant is forming a base. Using options to trade a bounce
The markets have been bleeding since late October, and the geopolitical shockwaves from the Iran conflict have only deepened the damage. During aggressive sell-offs like this, high-growth, high-beta stocks are typically the first casualties. Adobe (ADBE) is a glaring example of this, having given up roughly 35% of its value since December. However, we are finally seeing signs of a base forming, and several of these battered tech darlings are attempting to bounce. With the Cboe Volatility Index (VIX) still hovering above 20, caution is absolutely warranted. Trading volume should remain light, but that does not mean you have to sit on your hands completely. You can always test the waters with small, strictly defined positions. Today, I am looking at a classic mean-reversion setup in ADBE using two specific indicators: Fast MACD (5, 13, 5) I prefer this custom MACD setting because it highlights momentum pivots well before standard indicators catch on. We got a definitive bullish crossover on March 31, and that strength has persisted, with the blue MACD line actively tracking above the yellow signal line. Relative strength index: ADBE took a severe hit recently, driving its RSI right down to the critical 30 threshold and into oversold territory. My personal rule is to never buy a stock simply because it looks cheap or oversold. I need to see proof of life first. That confirmation arrived on March 31 when the RSI climbed back above the 30 level, signaling that buyers are stepping in and taking control. The trade setup: ADBE 240-245 bull call spread Here is how I am actually playing this bounce. I am going with a bull call spread. When the market is this nervous, I love this setup because it lets me catch the upside without leaving my account wide open to risk. I can take a shot at the reversal without tying up too much cash. Right now, we are looking at an entry cost of about $2.50. But here is the reality of trading in a headline-driven market: ADBE might gap down under $240 or rip past $245. That means we have to stay fluid. Do not marry the exact strikes. Instead, just build an at-the-money spread right around wherever the stock is currently trading. You buy the call one strike below the price and sell the one right above it. What I love most about this trade is that we do not need a massive rally. Just a tiny nudge in the right direction hits maximum profit. On a quick side note: If you are interested in a 100% rules-based system that takes the emotion out of the equation and handles entries and exits on its own, you can check out our auto-trading capabilities here . Here is my exact trade setup: Buy $240 call, March 8 expiry Sell $245 call, March 8 expiry Contracts: 1 Cost: $250 Potential Profit: $250 — Nishant Pant Founder: https://tradewithmaya.com/ Author: Mean Reversion Trading YouTube, Twitter: @TheMeanTrader DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.