Don’t expect this volatility to subside this week, as the Federal Reserve, economic data releases and a heavy earnings calendar will have traders on their toes.
This week, in an effort to keep the portfolio diversified, I’m adding a pharmaceutical play, AbbVie (ABBV).
Market Overview
Before diving into this week’s covered call idea, let’s address our stock positions coming out of January expiration.
On Friday the GT January 22 call that we sold for $0.65 expired worthless. And while the market looks suspect, GT has held up reasonably well. For that reason, this morning I am going to Sell to Open the February 22 call (exp. 2/18) for $1 (approximately).
Similarly, our PSTG and CIEN January calls that we sold expired worthless on Friday. However, while these stocks look OK, they are right at our stop level. Because the market is so weak, I am going to sell these stock positions and move on to better ideas.
However, if I would have preferred to continue to sell calls to lower my cost basis, in a defensive manner, I might look at the PSTG February 27 call and the CIEN February 66 call (exp. 2/18).
Moving on …
Losses continue to mount in early 2022 as the market suffered its worst week since October 2020. The Dow fell 4.6%, the S&P 500 lost 5.7% and the tech-heavy Nasdaq pulled back 7.6%.
However, after a significant pullback at the open on Monday, which saw some of the leading indexes lose more than 3% intra-day, all of the major indexes managed to close the day higher.
Don’t expect this volatility to subside this week, as the Federal Reserve, economic data releases and a heavy earnings calendar will have traders on their toes.
This week, in an effort to keep the portfolio diversified, I’m adding a pharmaceutical play, AbbVie (ABBV).
New Recommendation
The Stock – AbbVie (ABBV)
Why the Strength
Many biotechs had a tough 2021 thanks to factors ranging from drug pricing to controversies over the government’s approach to industry mergers. But a few biotechs managed to excel in the weak environment, with drug maker AbbVie being one of the star performers.
The company had a stellar 2021 and is in favor despite the fact that its U.S. patent on autoimmune treatment blockbuster Humira (38% of Q3 revenues) is set to expire in 2023. A key reason for the strength is AbbVie’s bulging pipeline, which includes treatments in several stages of testing across five main business segments: Eye care, aesthetics, hematologic oncology, immunology and neuroscience. Three treatments have already been approved for several indications and are expected to be top sellers in the coming years, including Rinvoq (for arthritis and dermatitis), Venclexta (for leukemia) and the just-approved Skyrizi (for psoriatic arthritis). Moreover, sales for AbbVie’s leading aesthetic drug, Botox, were up a solid 23% in Q3 from a year ago and is expected grow further in the years ahead. Additionally, Q3 revealed strength in AbbVie’s portfolio of schizophrenia, bipolar one disorder and bipolar depression drugs.
Management also touted its portfolio of migraine therapy treatments, which management said puts the company in a “very strong position” to capture growth in that market. On the financial front, third-quarter revenue of $14.3 billion increased 11% from a year ago, driven by the neuroscience business. Per-share earnings of $3.33 rose by 18%. And when AbbVie reports Q4 results on February 2, the top and bottom lines are expected to jump 8% and 12%, respectively. A cheap valuation (11 times earnings) and a 4.3% dividend adds to the attraction in this environment.
Technical Analysis
ABBV outperformed most of its biotech peers in the first eight months of 2021, rising from 105 last January to 120 by the end of August. But shares dropped sharply in September, hitting bottom at 106 later that month, nearly erasing all its gains from the start of the year. Buyers came to the rescue, though, and the stock etched out a higher low before taking off again in late October, partly as defensive-oriented stocks came into favor. A tightening-up period followed in November before ABBV roared higher in December. Stop – 118
The Covered Call Trade
Buy AbbVie Inc. (ABBV) Stock at 132.50, Sell to Open February 132 Strike Calls (exp. 2/18) for $3.70 or a Net Price of 128.80 or less
Static Return: $320 per covered call (2.48%)
Breakeven: 128.80
Covered Call Return (if assigned): $320 per covered call (2.48%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 128.80 or less. (In this case 132.50 minus 3.70 = 128.80. Or another example is you could pay 132 for the stock and sell the call for 3.20, which also equals 128.80)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
Goodyear Tire (GT) | 22.93 | 23.50 | 19.5 | January 22 - $0.65 | Expired |
Pure Storage (PSTG) | 33.15 | 27.00 | 26.5 | January 33 -- $2.25 | Expired |
Ciena (CIEN) | 74.20 | 70.25 | 64.0 | January 75 -- $2.50 | Expired |
Alcoa (AA) | 55.25 | 61.00 | 44.5 | January 55 -- $4.25 | Expired |
Jabil (JBL) | 71.00 | 62.50 | 62.5 | February 70 -- $3.20 | $0.30 |
Marathon Oil (MRO) | 17.80 | 18.00 | 15.4 | February 18 -- $1.02 | $1.00 |
Teck Resources (TECK) | 35.00 | 32.00 | 28.0 | February 33 - $2.87 | $1.00 |
The next Cabot Profit Booster issue will be published on February 1, 2022.