A 'butterfly' options spread trade that pays off if there's an earnings-driven rally in Adobe

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Tony Zhang breaks down a 'broken wing butterfly' options trade.

As investors become more sensitive to the size of capex spending by technology firms to chase artificial intelligence dominance, Adobe stands out as a company that already generates revenue from their image generation AI models. With earnings on deck after the close Thursday, this continued demand for Adobe's AI tools positions the company for further growth, especially as digital content creation becomes prominent across industries.

has tested this level multiple times over the past year, and a break above this resistance could signal a potential rally towards the $640 price target — which represents a historical high. If earnings surprise to the upside, we expect the stock to break out above $570 and continue its upward trend.

Sep 20, 2024 $585/630/650 Call butterfly at $10.96 Debit. This strategy entails: • Buying the Sep 20 $585 Calls @ $18.80 • Selling the Sep 20 $630 Calls @ $5.53 • Buying the Sep 20 $650 Calls @ $3.22 This butterfly strategy offers a maximum reward of $3,404 per contract while limiting risk to only $1,096 per contract. The breakeven is $595.96, and this structure allows you to profit if Adobe rallies towards $630 after earnings.

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