Straddle Traders Just Won Big on This Volatility Bet

ABBV straddle traders banked a huge profit in less than two weeks

by Emma Duncan

Published on Sep 26, 2019 at 2:41 PM

Subscribers to Schaeffer's Volatility Series -- an options subscription service that includes our popular Volatility Trader and Weekly Volatility Trader into one package -- just scored a major profit on the AbbVie Inc (NYSE:ABBV) September 67.50-strike put and call straddle. Below, we'll explain why we entered a straddle for ABBV shares, and how the winning options trade unfolded.

straddle is an attractive options strategy when the underlying shares are expected to make a fast and aggressive move, regardless of direction. We initially recommended the ABBV trade to subscribers on Friday, Sept. 6. At the time, the stock's Bollinger Band width had retreated to near extreme lows, indicating ABBV could be setting up to enter another period of volatility. Plus, AbbVie was slated to present at the Morgan Stanley Global Healthcare Conference the following week, another possible catalyst for a major move in the shares.

The equity was trading below resistance at its 50-day moving average, but remained above the support of its 20-day trendline. A break away from either of these trendlines could have the potential to result in an outsized move. 

Meanwhile, short interest on ABBV had been rising rapidly, and was sitting at a three-year high at the time of our recommendation. This also increased the chances for volatility going forward.

Lastly, the stock's Schaeffer's Volatility Index (SVI) registered in the bottom tenth of all readings taken over the past 52 weeks. This indicated near-term ABBV options were attractively priced, from a volatility perspective, which was ideal since a straddle consists of two bought legs.

Following our recommendation, the shares continued to climb higher, and popped almost 2% on Sept. 12, after UBS upgraded ABBV to "buy" from "neutral." This put the equity back above the $70 mark for the first time since mid-July, and days later, the security broke north of its 50-day moving average. By Sept. 20, AbbVie stock had climbed all the way up to $72.11, which allowed us to close the call position ahead of expiration -- and left the put trade to expire worthless -- and lock in a 110% profit in under two weeks. 

abbvie stock daily price chart sept 26

AbbVie Inc
AbbVie Inc
AbbVie Inc
AbbVie Inc
AbbVie Inc
AbbVie Inc
AbbVie Inc
AbbVie Inc
AbbVie Inc
The Bollinger Band width has retreated near extreme lows, indicating ABBV could be setting up to enter another period of volatility expansion.
The Bollinger Band width has retreated near extreme lows, indicating ABBV could be setting up to enter another period of volatility expansion.
The Bollinger Band width has retreated near extreme lows, indicating ABBV could be setting up to enter another period of volatility expansion.

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