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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The covered call and unhedged risk

I have written a few things on the Covered Call Strategy over the last two weeks. Please understand that those two previous articles plus this one do not constitute a proper, fully in-depth lesson on the Covered Call Strategy like we have in our classes at Option Monster Education. I have picked out a few topics that I believe were worth noting and today I am going to add the final one.

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