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Adobe looks cheap to trade ahead of earnings

Options traders bet on big move for Adobe after earnings tomorrow

Adobe's upcoming earnings report could be a moment for traders to cash in.

The options market is implying about a 4% move in either direction for shares of the cloud giant after it issues fiscal second-quarter results, Dan Nathan, co-founder and editor of RiskReversal.com, said Monday.

"That's in line with the average over the last four quarters of about 4% also, but down from the 10-year average of about 5%," he said on CNBC's "Options Action." "This one looks kind of cheap to me as far as the implied move is concerned."

That means options traders could be about to seize on this stock, which, according to Nathan, has spent most of 2019 rallying back to and consolidating at its prior highs from last year.

"Earlier in the month, it had a dip. It found some technical support right at its 200-day moving average," he said, adding that now, the risk of buying options on Adobe is muted relative to the implied move.

"How do we figure out the implied move? We take the weekly at-the-money straddle — that is the call premium plus the put premium — [and] if we looked at the $275 strike that expires this Friday, that's about $12," which would be about a 4% move for Adobe's stock, Nathan said.

For traders, that represents a unique chance to cap their risk while at the same time making an inexpensive bet on Adobe's report, scheduled for Tuesday after the bell, said Nathan, also a regular trader on CNBC's "Fast Money."

"If you have a directional bias and you want to define your risk either up or down, you could buy that at-the-money call for about $6 or that at-the-money put for about $6, and that way you are only risking 2% of the stock price," he said. "To me, this implied move in Adobe looks fairly cheap."

Adobe shares were up more than 1% shortly after Tuesday's opening bell. The stock is up 23% year to date.