Thursday, December 30, 2021

Options - ABBV

I've been spending some time studying option trading for the Dividend Town portfolio. As part of the Dividend Town strategy, I will be using covered calls to generate additional income, and utilize cash-secured puts for additional premium on securities that I want to own. With the exception of a disastrous $SPY put in November, I've done fairly well writing out of the money covered calls.  

I don't want to get too cute or creative with options. However, I will utilize them when I see an opportunity or to hedge one of my existing positions.

  • Covered calls - Will write out of the money short term options for a premium.
  • Cash secured puts - Sell an out of the money put for a premium.
One option I'm deploying today is a Strangle. A strangle is basically buying a long put and a long call as you believe the underlying stock could change direction. 

In this particular case, I'm buying 2 strangles for $ABBV. Abbvie has had some solid upwards momentum in the last two months. While ABBV has done well in the portfolio and I plan to continue holding, the sudden breakout gives me concern. I see opinions that ABBV is undervalued from Seeking Alpha contributors and yet they're trading at a 52 week high. 

Additionally, if you look below, you can see that they're trading at the top end of their Bollinger bands and their Relative Strength index is peaking in the 80's. None of this is a guarantee of a decline, but I'm feeling confident there's a correction on the horizon. 

My issue is that I do not know which way this is going, but based on my research I am fairly confident that we're going to see movement in either direction. I consider this a hedge against the current holdings.

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