October 8, 2022
Pharmaceutical giant AbbVie (ABBV) reported mixed results in its recent earnings report. While earnings beat the consensus estimate, revenue fell short. Notably, the company’s immunology portfolio, which includes popular TV-ad drugs such as Humira, fell short of expectations. ABBV’s CEO cited the usual (and seemingly generic) “economic headwinds” as hurting the company’s aesthetic business (ABBVIE makes Botox).
While analysts didn’t hit ABBV with any downgrades, there was a flurry of target price decreases. The average estimate is now $157, about 8% above Friday’s close. That doesn’t seem unreasonable, nor is the average analyst rating, which has been slipping into the buy-hold region.
On the charts, ABBV’s earnings knocked the stock below its 200-day moving average, a trendline that has provided solid resistance to any rally attempts other than a brief spurt prior to earnings. This trade is thus a bet that the stock will continue to trade sideways as it has for the past six months, with the 200-day defining the upper rail of the trading range. Note that the short call of our spread is above the 200-day, so the stock will have to break this resistance to move the spread into the money.
If you agree that ABBV will continue to respect the 200-day (blue line), consider the following trade that relies on the stock staying below $150 (red line) through expiration in six weeks:
Buy to Open the ABBV 16 Dec 155 call (ABBV221216C155)
Sell to Open the ABBV 16 Dec 150 call (ABBV221216C150) for a credit of $1.98 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Monday’s $148.10 close. Unless ABBV falls quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $196.80. This trade reduces your buying power by $500, making your net investment $303.20 per spread ($500 – $196.80). If ABBV closes below $150 on Dec. 16, both options will expire worthless and your return on the spread would be 65% ($196.80/$303.20).