Nothing about Abbvie’s (ABBV) share volume indicates investors were either enthusiastic or pessimistic about its stock on Wednesday.
The maker of Humira, the company’s blockbuster rheumatoid arthritis drug, had a total volume yesterday of a little more than four million shares, one-third less than its 30-day average. It ended up less than 1% higher on the day.
However, the options market tells a different tale.
Barchart.com’s Wednesday report of unusual options activity shows that of the top 100 call options with volume at least 1.25x the open interest (Vol/OI ratio), 18 were AbbVie call options. Not one ABBV put option made the top 100. In addition, there were 23 ABBV options with unusual options activity yesterday. Only one of them was a put.
Since hitting an all-time high of $175.91 in April 2022, ABBV’s been up and down like a yo-yo. Over the past year, it’s traded above $160 on three occasions and below $140 on two.
While there is plenty of pessimism revolving around AbbVie, which I will get to, yesterday’s call option activity suggests options investors believe it could be a smart buy.
AbbVie’s Option Activity Very Unusual
AbbVie’s options volume yesterday was 211,443. That’s nearly 30x its 30-day average. The last time it had a volume of more than 200,000 was April 12, 2022. If I were more of an options expert, I’d probably know why that’s not a coincidence—something to figure out. But I digress.
As I said in the intro, most of the ABBV volume yesterday was for call options. Of the 23 options with unusual options activity, 18 were in the top 100.
The breakdown of the 18 by days to expiration is as follows:
- 7 days or less = 6
- 8 days to 30 days = 8
- 31 days to 90 days = 3
- 91 days or greater = 1
Excluding DTEs of eight days or less, that leaves four call options. These should tell us something about investor interest in AbbVie stock.
The Options to Consider
First up is the call with the highest Vol/OI ratio. It is the May 19 $140 call, expiring in 36 days.
Its ask price was $22.55. Should the buyer exercise their right to buy, that brings the price paid to $162.55, 19 cents above Wednesday’s closing price. It had a volume of 4,836, 15.80x the open interest. The delta was 0.96519. AbbVie stock must rise by approximately $23.36 for the ask price to double. That’s 14% higher than yesterday’s closing price.
Given the stock’s up more than 6% in the past month, it’s possible. However, the S&P 500 was up a similar amount. So it could be just a case of a rising tide lifting all boats.
The second call option, and the only one not expiring in 36 days, is the June 21/2024 $85 call. It expires in 435 days or approximately 14 months from now. It has an ask price of $77.80, which brings the price paid should the right to buy get exercised to $162.80, 44 cents higher than its Wednesday closing price.
The May 19 $140 call’s ask price was 14% of its closing share price. Likewise, the June 21/2024 $85 call’s ask price is about 48% of yesterday’s closing price.
So, you should be asking yourself two questions.
First, is it worthwhile to put up 3.5x as much cash via the ask price to secure the right to buy 100 ABBV shares for between $162 and $163? Remember that you’re getting 399 additional days to ponder whether ABBV has the right stuff to hit $200 before then. My answer would be yes. Again, the duration advantage is critical.
The remaining two call options also expire in 36 days on May 19. One is a $135 strike, while the other is $130. The former’s ask was $27.65 for a price paid of $162.65, 29 cents higher than Wednesday’s closing price. The $130 strike had a $32.70 ask for a price paid of $162.70, five cents higher than the $135.
Based on their deltas, you’ve got a better shot at doubling your money -- assuming you sell the call before expiry -- with the $135 strike.
If you want to make money on the option and aren’t as concerned about owning ABBV stock, I would say the $85 strike is the play. However, if you want to own AbbVie, the 2024 call makes a lot of sense.
Should You Buy AbbVie?
The big knock against AbbVie is that it doesn’t have an immediate replacement for Humira, whose revenues are expected to fall by nearly 40% in 2023 due to the drug losing some of its patent protection.
AbbVie’s three most significant revenue-generating drugs over the past three years have been Humira, Skyrizi, and Rinvoq. In 202o, Skyrizi and Rinvoq accounted for 10.5% of the trio’s $22.15 billion in revenue. In 2021, it was 18.2% ($25.28 billion); in 2022, it was 26.6% ($28.93 billion).
Over the past three years, Skyrizi and Rinvoq have doubled their overall contribution to the trio’s total annual revenue. The problem is that Skirizi and Rinvoq will not get to 50% for several years, even if it continues to add eight percentage points of revenue contribution.
As a result, AbbVie could see declining revenues beyond 2023. However, the company expects to return to robust sales growth in 2025. Between now and 2025, investors will be watching quarterly reports with interest. Any surprises, good or bad, will likely move the stock significantly.
Of the 26 analysts covering ABBV, 12 have a Buy rating, 13 give it a Hold, and one a Moderate Sell with a $164.64 average target price. However, even the analysts are sitting on the fence.
I’d go with the June 21/2024 $85 call if it were me. It gives you enough time to decide whether AbbVie is turning the corner on Humira. If it does, you’ll get the stock at an attractive price.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
