Options Trading News

May 3, 2013  Fri 4:14 AM CT

AbbVie pulled back yesterday, but the bulls quickly jumped in.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 14,500 August 47.50 calls for $1.05 and the sale of an equal number of August 40 puts for $0.80. Volume was more than 5 times the previous open interest at each strike, indicating that new money was put to work.

The investor paid $0.25 to open the position and now stands to profit from stock gains in the drug maker, which was spun off from Abbott Laboratories on Jan. 1. The long calls will appreciate and the puts sold short will lose value should shares push higher, while the opposite will happen to the downside.

The benefit of the strategy is that it provides inexpensive long exposure to the stock, while programming a buy order on a drop to $40. (See our Education section for more on how options can be used to manage trades.)

ABBV is down 3.42 percent to $43.99 yesterday but is up 29 percent so far this year. It's been climbing along with other pharmaceutical names and as the company blends existing medicines in hope of curing Hepatitis-C. It fell yesterday after Gilead Sciences raced ahead in the competition to launch a cure for the disease, which infects hundreds of millions of people globally.

Total option volume in ABBV was 4 times greater than average in yesterday's session.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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