This week’s High-Yield Trade of the Week is with AbbVie (ABBV), a high-quality dividend growth stock that looks undervalued right now.
The high-yield trade idea featured below is similar to the high-yield trade I made in my retirement portfolio last week.
In short, I sold one June 17, 2022 $105 PUT option on ABBV for $9.50. This trade generated $950 in “instant income”.
If you’re interested in making a similar high-yield trade for yourself, here’s what we’re looking at as we go to press today. Since share prices and options premiums are constantly changing, the numbers below are approximate at the time this alert is being published this morning.
High-Yield Trade of the Week:
Sell the June 17, 2022 $105 PUT on shares of AbbVie (ABBV)
As we go to press, ABBV is selling for around $107.67 per share and the June 17, 2022 $105 puts are going for about $8.65 per share.
Our trade would involve selling one of those puts.
By selling a put option, we’re giving the buyer of the option the right, but not the obligation, to sell us 100 shares of ABBV at $105 per share (the “strike” price) anytime between now and June 17, 2022 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option is paying us $8.65 per share (the “premium”).
There are two likely ways our High-Yield Trade of the Week would work out, and they’re both attractive…
Scenario 1: ABBV falls below $105 by June 17, 2022
If ABBV falls below $105 by June 17, 2022, we may be obligated to buy 100 shares at $105 per share.
In exchange for our agreement, we’d be paid an instant $865 (100 shares X $8.65 per share).
Taking this income into consideration, our cost-basis would drop to $96.35 per share.
That’s a 10.5% discount to the $107.67 share price that ABBV is selling for right now.
Scenario 2: ABBV stays above $105 by June 17, 2022
If ABBV stays above $105 by June 17, 2022, the contract expires worthless and we’d get to keep the $865 in income.
This works out to a 8.2% return on what our purchase obligation would have been ($8.65 / $105.00) in 263 days.
If we can repeat these results over the period of a year we could generate an 11.4% yield from AbbVie without even buying shares.
Good Trading!
Greg Patrick
P.S. We’d only make this trade if: 1) we wanted to own the underlying stock anyways 2) we believed the strike price was a reasonable price to pay for the stock if we’d end up being “put” shares 3) we were comfortable owning the stock for the long-haul in case the price drops significantly below our cost basis by expiration and 4) we were comfortable “letting the stock get away from us” if the stock takes off and our contract expires worthless. To be mindful of position sizing, except in rare cases, the value of this trade (if put shares) wouldn’t exceed 5% of our total portfolio value. In addition, to minimize taxes and tax paperwork, we would most likely make this trade in a retirement account, such as an IRA or 401(k). Finally, and very important for managing risk, we’d only sell CASH-SECURED puts… never “naked” puts on margin.
Please note: We’re not registered financial advisors and these aren’t specific recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we do our research, to the time we publish our article, to the time you’re alerted about it. So please don’t attempt to make this trade yourself without first doing your own due diligence and research.
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