Option Writing Can Be Lucrative
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I wanted to reflect on how we have been able to enhance our income with AbbVie (ABBV) over the last few months now. It all began on January 14th, 2021. That is when we initially started the series of trades that saw us generate $2.88 per share out of ABBV over the last three months.
(Source)
Why is this significant? Consider for a moment that the dividend per quarter for ABBV is $1.30. At $2.88, we have 2.22x that amount. Of course, it takes a more active approach and a little bit of luck. As I’ve mentioned in our last ABBV premium collection piece, the stock has been showing a lack of volatility. This means that from originally being put the position, we haven’t had to subsequently have it be called away on our covered call writing approach.
On the flip side, it also typically means lower premium collections anyway. We won’t ever know what it “could’ve been” had volatility been meaningful over the last three months.
We were even fortunate to hold the stock through its last ex-div date on April 14th. Thus, we are now entitled to that $1.30 as well as still having the position to further explore writing more calls. With that in mind, premiums were looking quite tempting on Friday! This was helped a bit by a move higher from ABBV.
(Source - Google Finance)
Looking at the April 30th, 2021 expiration with a strike of $111 we could have collected $0.98 - annualized comes to 24.76%!
May 7th, 2021 expiration with a $111 strike would have seen us receive $1.19 per share. That would’ve been good for an annualized return of 19.5%+. Going out even further to May 14th, 2021 at the same strike as the previous examples could have netted us $1.66 or a 20.21% annualized return.
All well within my loose guide of wanting to collect 15%+ annualized returns on my contracts. However, besides the price heading higher, ABBV is going to report its Q1 earnings on April 30th, 2021. That is why the premiums are looking a bit juicer at this time too.
This leaves us with a dilemma. We can take the attractive premiums now, risk seeing ABBV pop significantly on great earnings. Or, we can let the chance slip past us and see ABBV report terrible earnings that send shares lower. Potentially much lower to where we wouldn’t collect anything of worth at our $111 strike price that I’ve been favoring.
It could always go the other way as well - good earnings, price drop - or bad earnings, price pops. You just never know what the market will take and run with.
As far as an earnings surprise is concerned, ABBV has a history of beating expectations quarter after quarter. They’ve only missed EPS once in the last several years now.
(Source - Seeking Alpha)
Anyway, long story short - we collected $2.88 in a quarter with ABBV. A little bit of luck certainly goes with this. This was 2.22 times the quarterly dividend that ABBV pays. Easily showing how lucrative option writing can potentially be.
I suspect if we see Monday open higher once again, it’ll be even harder to resist the temptation of harvesting what should be an even higher premium at such a time. We will have to wait to see what Monday brings!
Disclosure: Long ABBV
This is not investment advice but for entertainment purposes only. Any decision to buy or sell is solely made by that individual. Speak with a financial professional to develop an investing plan that is right for your own objectives and goals.