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As Easy as ABT

Abbott
Laboratories (ABT) reported earnings before the bell on Thursday that beat top-
and bottom line estimates. Moreover, the medical device, diagnostics and
nutrition company beat expectations across all major business segments. While
impressive year-over-year comparisons were helped by depressed activity a year
ago, sales grew by 11% compared to 2019. Analysts were notably impressed, and
many upgraded their price targets to as high as $136 (the stock closed at $121
on Friday).

The stock dropped on Thursday as much as 2.6% but recovered to close above its 20-day moving average (blue line in chart). This trendline has provided unwavering support since the stock climbed above it in late June. This is part of a larger rally that has covered 15% since the beginning of June. Friday’s 2% jump pulled the stock above the 120 level (red line in chart), which has served as a top since early May. The next sight of potential resistance is 125, the site of April’s high. After that is ABT’s all-time high of 128.54 reached in mid-February.

ABT Chart

If
you agree that ABT will stay above its 20-day moving average, consider the
following trade that relies on the stock remaining above 118 (green line in
chart) through expiration in five weeks.

Buy
to Open ABT 27Aug 115 put (ABT210827P115)
Sell to Open ABT 27Aug
118 put (ABT210827P118) for a credit of $0.90 (selling a vertical)

This
credit is $0.03 less than the mid-point
of the option spread when ABT was trading at $121. Unless the stock rallies
quickly from here, you should be able to get close to this amount.

Your
commission on this trade will be only $1.30 per spread.  Each spread would then yield $88.70. This
trade reduces your buying power by $300 and makes your net investment $211.30
($300 – $88.70).  If ABT closes above
$118 on August 27, both options will expire worthless
and your return on the spread would be 42% ($88.70 / $211.30).

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