It’s not too often where investors have a real opportunity to pick up a market leader at an attractive discount that offers the best of both growth and income potential — and do so with defined risk.
But that’s the type of situation being offered in AbbVie Inc (ABBV) stock right now.
It’s that type situation which is currently being offered in AbbVie stock right now.
AbbVie, which is a research-based biopharma, is the result of a 2013 spinoff by pharma giant Abbott Labs (ABT). AbbVie’s impressive portfolio includes the anti-inflammatory product Humira, which has been one of the most successful prescription drugs of all time.
ABBV has its new hepatitis C drug Viekira Pack to boost profits, and AbbVie also should benefit from a healthy pipeline. Meanwhile, an acquisition of Pharmcyclics and a recent Food and Drug Administration “Orphan Drug” approval for a new Humira treatment for acne inversa are two developments are other things supporting AbbVie stock.
AbbVie Stock Chart
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Since topping out in late July as part of a failed pattern breakout from a seven-month cup-shaped base, AbbVie stock has dropped by about 27%.
Corrective activity of this magnitude is far from unusual, and it allows ABBV the opportunity to reset technically from a more neutral position cleansed of weaker holders and potential excesses.
The price correction in AbbVie stock also looks attractive at this time as three hammer reversal candlesticks have formed after taking out the low of the former weekly base.
In our view, this combination of bullish candlesticks and failure on the part of the bears suggest that the correction is over, and that we’re not seeing the beginning of a bear market in shares of ABBV.
AbbVie Stock Bull Call Spread
Right now, the Nov $58/$60 bull call spread is attractive. With ABBV trading at $55.70, the out-of-the-money call spread is priced for 50 cents mid-market.
The current price for this particular vertical spread allows for a max return on investment of 300% above $60 at expiration.
Such a move would require AbbVie stock to rally by 7.7%. But given an earnings catalyst on Oct. 30 and an additional couple weeks of holding time for this spread, the profit proposition grows strongly in our opinion.
To reduce risk, the trader can always re-adjust into a long stock position after earnings and be in position to collect AbbVie stock’s next juicy dividend which isn’t until 2016. That of course, is contingent upon ABBV being cooperative in the coming weeks and moving higher.
What if AbbVie stock fails to move up in price or shares simply take out the current technical low? Unlike with a long stock position, the bull call spread’s risk is limited to 50 cents, or less than 1% of stock risk on an equivalent 100 shares of ABBV per spread.
And while the limited-risk feature of this vertical isn’t a cure-all for financial losses, it generally is a good tactic to take around an earnings release.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
