There’s always a dance between a company and Wall Street analysts. When analysts throw out a number and a company misses, it’s an excuse for a large selloff in shares. However, that also sets up the opportunity for astute traders to pick up the pieces and profit.
This expectation shuffle is a key part of trading earnings season, especially for traders who want to wait until after the numbers have been announced to make their move.
Case in point? Adobe (ADBE). The software company provided a decent outlook for fiscal 2022, but it fell just a bit shy of what analysts were expecting. The company expected revenues of just $17.9 billion while analysts expected $18.2 billion.
This 1.65 percent difference led to a drop of over 10 percent in shares – a classic overreaction.
Over the past year, the company grew earnings and revenue by 27 percent and 22 percent over the past year. And Adobe has a massive 39 percent profit margin.
Action to take: We have a massively profitable software company that took a big dive relative to some modestly bad news. That makes shares look like a potential swing trade in the coming weeks. Investors can buy shares and look for a small rally, but won’t get paid a dividend along the way.
Traders may like the March $600 calls. Last going for about $28.50, the option lost more than half its value on a 10 percent drop in shares. That can likely rebound in the coming weeks, and traders can potentially nab a mid double-digit profit.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.