Yesterday I bought some ABT Jan 2014 50.0 calls for $15.60. With the stock trading at $65.47 when I got it done, the time cost at 13 cents was very reasonable. If I had borrowed money to buy Abbott (NYSE:ABT) shares, it would cost me considerably more than that in interest.
Abbott will be spinning off its R&D based pharmaceutical business as AbbVie (NYSE:ABBV) by means of a special dividend on 1/1/2013, and the new stock is expected to start trading on the NYSE the next day. The company's shares have been trading below their historical average multiples, and the transaction represents an effort to create shareholder value by letting the two separate parts of the company find their own level.
The company comes up on a screen for dividend growth with above average quality, and is well-known and widely covered. Checking on FASTGraphs (I'm a paid subscriber), I interpret the charts to show that ABT is undervalued. I'm estimating the 5 year return from holding the shares at 10% annualized.
Normally, my methods would involve selling covered calls as a way of funding the time premium on the LEAPS. However, with volatility as low as it is, there is very little cost to controlling the shares, and volatility may increase after the spin-off. The options I own will become non-standard, calling for the delivery of shares of both ABT and ABBV, plus a small amount of cash in lieu, since there will be no fractional shares.
In any event, I feel that the low cost of controlling the undervalued shares makes for an attractive investment opportunity. After the transaction completes in January, I will continue to monitor developments, and sell covered calls if either of the two companies makes an upward move. Hopefully share prices and options premiums will increase when they are trading separately.
As a disadvantage, my broker won't accept non-standard options as coverage for the sale of calls, so there will be some maintenance requirements.
Disclosure: I am long ABT.