AbbVie Inc (NYSE:ABBV) is part of a notoriously volatile sector even under normal circumstances. Add to it an election cycle where they’ve been the hottest political football and you get a sector wilder than the real running of the bulls in Pamplona.
Case in point, ABBV stock is now 30% higher than last November and 60% since a year prior to that. So why am I sharing a bullish trade today this late in the rally? Potential.
Between March and May the stock established a strong base from which it leapt higher. I consider it a tabletop that is likely to hold or at least provide strong support should there be a correction in the near future. This is support that I can leverage to capture the positive potential that could be coming.
However, since indeed this seems late in the upside cycle on this rally I won’t buy the stock at $73 and without any room for error hope it lives up to it. Instead, I will use options to get paid from the action even if it turns out to be less than perfect. There I can spend less and build a buffer to set my thesis in motion.
Click to Enlarge It is important to note that I don’t employ these strategies with just any stock. ABBV is a fundamentally sound company and from a PE perspective it’s half as cheap as Merck & Co., Inc. (NYSE:MRK).
It’s even cheaper than Pfizer Inc. (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ). So if I end up owning the shares at 18 price-earnings ratio it wouldn’t be the end of the world as U would own a reasonably priced asset.
My thesis here is that technically ABBV looks like it wants to set new highs soon. I want to sell puts below support so I can generate income as the rally continues. Central to my execution is the fact that I am willing and able to own ABBV stock 10% lower in case I am wrong.
ABBV Stock Options
The Trade: Sell ABBV stock Nov $65 put naked and collect 90 cents to open. Here I have a 90% theoretical odds of retaining my premium for maximum gains. Otherwise and if price falls below my strike then I then own the shares and accrue losses below $64.10.
For those who don’t want to own the shares, I could use the $65/$62.50 credit put spread where the risk is limited thereby making it easier to manage. The spread would still yield 11% on risk. In either case I need AbbVie stock to stay above my strike to win.
I waited until now to commit because I wanted to see which way will the breakout go. The chart clearly shows that the bulls are in still charge. So I will watch for the next decision point around $73.7. If the bulls break through a neckline resistance point after a long struggle they often overshoot higher. In this case it would mean an additional 9% from there. So I could then chase it with a debit call spread.
The Juice (Optional Upon Trigger): Buy ABBV stock Aug $75/$77.50 debit call spread which could cost 40 cents to open and deliver $2 in profits. I have to note that earnings are coming soon and management usually beats estimates. So I may want to set this before the event, as it could serve as the catalyst. Analyst expectations are humble, so that helps too.
Remember: Investing is risky, otherwise there would be no reward, so never risk more than you are willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.