AbbVie Put/Call Combination Produces 400% Greater Return

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction and Set-Up

Below I’ll discuss my year-long call/put combination using AbbVie as an example. I’ve successfully been able to obtain a 15.3% return based on the current stock price while the buy and hold strategy would've only yielded 3.6% return. This is greater than a 400% difference in overall returns for this given stock over the past year. Leveraging the coupling of calls and puts around a core position over time can accentuate total returns and mitigate risk on a given stock. As discussed in more detail below, covered calls and covered puts can be combined to one's advantage. This is especially true in large-cap, dividend-paying stocks that tend to trade within a narrow range for long periods of time. AbbVie Inc. (NYSE:ABBV) is a prime example that fits this narrative and thus the stock of choice for this piece. Over the past two-plus years this stock has traded in a tight range between $55 and $65 per share while paying a dividend of ~4% on an annual basis (Figure 1). The company has strong fundamentals, financial stability and a robust pipeline for potential growth and sustainability. The goal here to initiate a position in AbbVie using a covered put to purchase the stock at a lower price than it's currently trading at a future date while collecting a premium in the process. If the stock isn't assigned then walk away with the premium and freed up cash that was earmarked for the potential purchase. If the stock is assigned, then shares are purchased at the agreed-upon price (strike price), less the premium for the actual purchase price. Now we've entered the position via leveraging a covered put, now the shares can be leveraged for covered calls to extract additional value throughout the holding of the stock while collecting the dividend. Ideally, we want to enter the position via a covered put and endlessly sell covered calls while collecting the dividend. However if the stock is called away during the selling of a covered call then this process can be repeated while being cognizant of the x-dividend dates to enhance overall returns.

Chart of AbbVie Inc. (NYSE:ABBV)
Figure 1 – AbbVie’s tight trading range over the past 2-plus years
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