How To Make A 15% Covered-Call Annualized Return In AbbVie

AbbVie (ABBV) is currently one of the highest yielding stocks in the S&P 500, with a dividend yield of 4.9%. The stock has pulled back in recent weeks following the Food and Drug Administrations ruling that a warning label must be added to its drug, Rinvoq.


Despite the setback, AbbieVie stock is still showing solid earnings growth with a three-year EPS growth rate of 17% and a 33% growth rate in the last quarter.

While the stock is not currently in a buy zone, income focused investors may want to seek a trade in the stock for the high yield.

Knowledgeable investors can also further enhance the yield on the stock through the use of covered calls.

Setting Up The Trade In AbbVie Stock

Let’s look at how a covered call trade on AbbVie stock might take shape.

Buying 100 shares of ABBV stock would cost around $10,700. A November-expiring monthly call option with a 110 price strike was trading recently around $2.55. This generates $255 in premium per contract.

Selling the call option generates an income of 2.44% in just under two months. Think of this return as equaling around 15% annualized.

Selling the call further out-of-the-money also gives the trade some upside potential.

If ABBV stock closes above 110 on the Nov. 19 expiration date, the shares will be called away at 110. Such action leaves the trader with a total profit of $555 (gain on the shares plus the $255 option premium received).

The Annualized Return Potential

That equates to a 5.2% return, or 32.6% on an annualized basis.

Of course, the risk with the trade is that AbbVie stock might continue to drop, which could wipe out any gains made from selling the call.

With markets looking shaky, investors looking to increase their income can use covered calls and cash secured puts on high dividend stocks.

Please remember that options are risky, and investors can lose 100% of their investment.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.


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