Traders taking short-term pharma position?

  • Short-term ABBV calls outpaced puts on Tuesday
  • Stock has consolidated since falling 8% on April 27
  • Latest pullback has held above February and March lows

Tuesday’s price action in pharma stock AbbVie (ABBV) may have lacked conviction—the stock pushed above Monday’s high and slipped below its low, and spent much of the day around breakeven—but trading in its options was more focused.

AbbVie appeared early on different scans for unusual options activity in early trading, including high call-put ratio, thanks to a particularly heavy volume in the May 12 $152.50 calls (expiring on Friday):

Chart 1: AbbVie (ABBV) May 12 call options, 5/9/23. AbbVie (ABBV) options chain. Heavy volume in short-term OTM calls.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Volume in the contract topped 14,000 later in the morning, representing more than $210 million worth of stock. Bottom line, unless ABBV shares rallied at least 3.5% above the midpoint of Tuesday’s range ($147.37) by Friday, the options would expire worthless. When attempting the difficult task of deciphering options activity, it can be helpful to keep two principles in mind:

1. There are two sides to every trade.
2. A position has no relevance beyond expiration.

The first point is important because, while some people may reflexively assume heavy call activity means traders are bullish on the underlying stock, for every call buyer there’s a seller with the opposite outlook. In other words, it’s equally possible that a large trader (or traders) initiated these trades—i.e., they sold the calls because of their conviction that ABBV shares wouldn’t reach the $152.50 strike price by Friday. That means they’d get to keep roughly $98,000 in collected premium (based on the price at which most of Tuesday’s volume took place—$0.07).

The relevance of the second point is that regardless of whether someone decides heavy options volume  represents a bullish or bearish outlook on a stock, that outlook is relevant only for the lifetime of the options. In other words, traders who bought ABBV calls yesterday may have been bullish about the stock, but that bullishness was, by definition, limited to just the handful of days until options expiration. The same applies, in reverse, for options sellers with bearish outlooks.

AbbVie’s shares have consolidated since dropping 8% after April 27’s earnings announcement. Although the company topped its headline numbers, it also reported declining sales in some of its drugs, including a 25.2% drop-off in Humira, its flagship arthritis drug, which is facing increased competition:1

Chart 2: AbbVie (ABBV), 1/5/23–5/9/23. AbbVie (ABBV) price chart. Post-earnings consolidation.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

The stock briefly rebounded before testing its lows late last week and this week. But the pullback has, so far, held level with the stock’s March low, and above the early-February lows around $143.50.

Market Mover Update: Another stock that sold off after releasing earnings on April 27, Impinj (PI), has rebounded more than 16% (see “The volatility challenge”). Tyson Foods (TSN) fell another 4.3% intraday on Tuesday after Monday’s 16.4% sell-off. Morphic (MORF), which snapped a five-week correction with a 20%-plus rally on April 17, has gained an additional 35% since.

Today’s numbers include (all times ET): Mortgage applications (7 a.m.), Consumer Price Index, CPI (8:30 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Roblox (RBLX), New York Times (NYT), Wendy’s (WEN), Walt Disney (DIS).


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1 Reuters. AbbVie posts weak sales of newer drugs as Humira faces fresh competition, shares fall. 4/27/23.

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