The last time I wrote an article on Abbott Laboratories (ABT) was in mid-September. I was bullish on the stock and also suggested a short-term income play that panned out. Here is the income play I suggested:
The Options Play
Presently, the stock is trading at $68.25.
-- Buy a November 2012 call with a strike price of "67.50" (priced at $1.84)
-- Sell a November 2012 call with a strike price of "70.00" (priced at $0.69)
-- Net Debit to Start: $1.15
-- Maximum Profit: $1.35
-- Maximum Risk: net debit
-- Maximum Length of Play: two months
Reasoning Behind the Trade
-- Before the split, I expect value to continue to go up.
-- Humira will elevate the value of pharma section AbbVie.
This was a good play as the stock continued to rise. I closed out the option play in early October when the stock moved up above the "71" price point. I am fortunate that I closed it out when I did and did not continue to wait, because the stock had a huge bearish day followed by a gap down and I would have been on the losing end of the play by then.
The start of this whole move was earnings. In the typical fashion of the quarter, Abbott beat earnings estimates but came up short in terms of revenue forecasts and this continues to put investors at large on edge. Revenue expectations were about $9.94 billion, but came in at $9.77 billion. This pattern has been going on in the markets for some time and investors are getting smart. After a couple years of tightening the belt, there is not much more to cut back on as companies are about as lean as they can be. As earnings continue to rise and revenue continues to shrink, there is going to be a meeting of the minds and earnings are going to have to come down. I am sure this led to the move down.
Expectations for Abbott have been high. Earnings expectations have grown by a penny over the last three months, and the stock has surged about 28% since the beginning of the year. It is hard seeing a 10% correction in one week. And a move like that usually does not continue -- it is just too fast. I believe this correction has brought the stock back down to a sensible level.
In terms of long-term investments in the stock, I am still of the opinion it is a good investment with the split coming soon. As for another short-term increase strategy to go with this investment, I do not believe now is a good time to create one. With the stock attempting to hold on to this foundation, I would wait to see if it defines any direction before I would invest in it short term.
Click to enlarge image.
Technically Speaking
The huge gap down I observe comes after a huge bullish day, followed by inactivity, and then a huge bearish day to bring it back to where it was. This precedes the gap down. The gap appears much bigger than it is. The drop is substantial, but the one-day rise before that was also just as great, and this leads me to believe the whole move up and down was reactionary. But a reversal could be seen coming anyway.
The RSI indicator was signaling weakness in the move up as it formed a negative divergence. The MACD Histogram also supports this divergence first seen in the RSI. Therefore, the move down is not unexpected. As the Bollinger Bands have widened, the stock looks as if it is trying to build support at a predefined level. It is presently moving sideways toward the middle band. This is a good place to build a foundation for the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
