First-quarter earnings season is in the rearview mirror, but a couple of technology heavyweights are on the calendar, including Adobe (ADBE). Adobe stock last month pushed through the 400 level in heavy volume and could be on the cusp of a breakout from a long base that started in mid-August.

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Software stocks sold off hard Wednesday, including Adobe, which fell 3.4% in heavy volume. But ADBE held above its 10-day moving average. Shares rallied sharply Thursday after the company introduced a new platform for its Firefly generative AI model for enterprise customers where users can generate images from text-based descriptions.

Shares popped again early Friday after Wells Fargo upgraded Adobe stock to overweight with a 525 price target. Mizuho raised ADBE’s price target to 450 from 375.

Oracle (ORCL), meanwhile, continues to show relative strength after a breakout over a 91.22 entry in late March. ORCL stock has made excellent progress since then, finding support at the 21-day exponential moving average along the way.

Results from Oracle will be out Monday after the close. The Zacks consensus estimate is for adjusted profit of $1.58 a share, up 3% from a year ago. Revenue is seen rising 16% to $3.74 billion. That’s on the heels of 18% revenue growth for three straight quarters.

Adobe Stock Shows Bullish Action

Adobe’s prior two earnings reports brought buyers into the stock. When the company reported results on March 16, shares jumped nearly 6% after ADBE reported a 13% rise in quarterly profit, with revenue up 9% to $4.66 billion. Revenue at the company’s Digital Media segment, which includes Creative Cloud, did $3.4 billion in revenue, up 9%.

Creative Cloud accounted for the majority of Adobe’s revenue in fiscal 2022, with $11.6 billion in annual recurring revenue.

Results for the quarter ended in May are due Thursday after the close. Adjusted profit is seen rising 13% to $3.78 a share, with revenue up 9% to $4.76 billion.

In September, Adobe announced plans to acquire digital-design rival Figma for $20 billion. But the deal is in the crosshairs of regulators, including the U.S. Department of Justice, due to antitrust concerns.

Like Oracle, Adobe has a consistent track record of annual earnings growth. But annual earnings are expected to fall 3% this year, with growth ramping back up in fiscal 2024 by 10%.

Outside of the technology sector, homebuilders have been on a tear. Inside the group, results from Lennar (LEN) are due Wednesday after the close.

Revenue growth slowed to a crawl when the company reported results in March, up 5% to $6.5 billion. But deliveries increased 9% to 13,659 homes.

Commenting on the results, CEO Stuart Miller said: “Homebuyers are considering the possibility that today’s interest rate environment may be the new normal. Accordingly, the housing market continues shifting as growing household and family formation continued to drive demand against a chronic supply shortage.”

Fiscal Q2 profit is expected to fall 51% to $2.32 a share, with revenue down 13% to $7.3 billion.

Despite housing market headwinds — namely higher interest rates — Lennar stock continues to respect its 10-week moving average after a breakout from a cup-with-handle base in April.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a call option trade recently looked like for Adobe stock.

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First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week lines for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at Cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

See Which Stocks Are In The Leaderboard Portfolio

This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Adobe Stock Option Trade

Here’s how a recent call option trade looked for Adobe, a liquid name in the options trading market.

When Adobe stock traded around 435, an in-the-money monthly call option with 435 strike price (June 23 expiration) came with a premium of around $1,895 per contract, or nearly 4.4% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of Adobe stock at 435 per share. The most that could be lost was $1,895 — the amount paid for the 100-share contract.

When taking the premium paid into account, Adobe stock would have to rally past 453.95 for the trade to start making money (435 strike price plus $18.95 premium per contract).

Keep in mind that this isn’t a trade for a small portfolio because buying 100 shares of Adobe stock would cost $43,500.

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.

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