3 Ways to Profit from the AbbVie-Allergan Deal

ABBV Stock Plummeted on News of the $63 Billion Buyout. But You Can Still Profit from a Long-Term Turnaround.

Shareholders of AbbVie (ABBV) woke up Tuesday to news that the company had bought Allergan (AGN) in a deal valued at $63 billion. Unfortunately for those ABBV shareholders, they also woke up to their stock down 15% in reaction to this news. While analysts and traders will be hyper-focused on what the AbbVie-Allergan deal means, as an options trader I am focused on how to play a longer-term turnaround for ABBV stock via Call Buying.

Based on the reaction of ABBV stock, the market/traders are not fans of this deal (though there also could be deal arbitrage, which is putting selling pressure on ABBV).

Not surprisingly, AbbVie Chairman Richard Gonzalez is quite excited about the two companies coming together.

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Here’s what he said: “This is a transformational transaction for both companies and achieves unique and complementary strategic objectives. The combination of AbbVie and Allergan increases our ability to continue to deliver on our mission to patients and shareholders. With our enhanced growth platform to fuel industry-leading growth, this strategy allows us to diversify AbbVie’s business while sustaining our focus on innovative science and the advancement of our industry-leading pipeline well into the future.”

And according to Bloomberg, “AbbVie said it expects at least $2 billion in annual pretax synergies and other cost reductions in year three of the deal. About half of that will come from optimizing the research and early-stage portfolio of products and cuts in overlapping R&D resources, while the rest will come from sales, general and administrative expenses and costs for manufacturing, supply chain and procurement.”

If I was a believer in the ABBV Chairman’s vision for these two combined companies in the wake of the AbbVie-Allergan deal, and wanted to play a stock bounce using options, I could go about it three different ways.

3 Ways to Play the AbbVie-Allergan Deal

With the stock trading at 67, I would target a buy on the 70 strike. This call buy at the 70 strike would give me the right, but not the obligation, to buy the stock at 70 at some point in the future. I would only exercise this right to buy ABBV at 70 if ABBV were trading above 70.

Trade 1 – Buy to Open the July 70 Calls for $1

The most I can lose on this trade is the premium paid, or $100 per call purchased. I would lose this $100 if ABBV is trading below 70 on July 19. (Because each 1 call represents 100 shares of stock, the price of $1 is actually $100 … it’s a multiplier of 100.)

However, to the upside above 71 (which is the breakeven) I would make $100 per every $1 the stock rises above 71. While the $100 is a cheap price to get exposure to an ABBV turnaround this is my least favorite of the trade ideas as I don’t anticipate the stock shooting back higher in the next month, though it is certainly possible.

Trade 2 – Buy to Open the January 70 Calls for $4

 The most I can lose on this trade is the premium paid, or $400 per call purchased if ABBV were to close below 70 on January 17, 2020.

To the upside, above 74 (breakeven), I would make $100 per $1 the stock rises above 74. I like this trade, as it gives ABBV seven months to recover from this initial stock sell-off.

Trade 3 – Buy to Open the June 70 Calls (expiring in 2020) for $5

The most I can lose on this trade is the premium paid, or $500 per call purchased if ABBV were to close below 70 on July 17, 2020.

To the upside, above 75 (breakeven), I would make $100 per $1 the stock rises above 75. This is my favorite of these three trade ideas, as I have essentially bought a year’s worth of time to have exposure to a longer-term ABBV turnaround.

Is this mega-merger a positive game changer for AbbVie? It’s truly anyone’s guess.

For that reason, I’m not recommending buying ABBV just yet – at least not based solely on the AbbVie-Allergan deal. However, if I wanted bullish exposure to any stock that appears well positioned for a turnaround next year, paying $400/$500 for a call option is a great risk/reward in my opinion.

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Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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