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 . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
