Pfizer Inc. (NYSE:PFE) has had a decent year, rising 11% year-to-date and 8% in the past 12 months. But it still trails the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB), which is up 28% in the past 12 months.
Fundamentally, PFE stock could play catch up since its value is mid-range compared to its competitors. It’s not absolutely cheap with a price-to-earnings ratio of 26, but it pays a hefty dividend.
And in an ascending equity market, Pfizer should do well. Therein lies the opportunity that I want to capture today.
Today’s trade is bullish PFE stock. But instead of buying the stock at face value and risking $36 per share, I prefer to bet on proven support. This way I can generate income out of thin air.
Stock markets are an all-time high, so expecting further extended rallies with no room for error seems risky to me. Using Pfizer options allows me to build a buffer between its current price and the levels of risk I’m willing to take.
Technically, PFE is in a 10% rally that started in August and it is approaching its highs. So it’s entirely possible that at some point in the near-term it reverses towards the mean. This would put it closer to $34 per share than $36. Although this is not a forecast, it is a possibility for which I need to make room.
It can fall all the way down to 33 and still maintain the current S ending channel.
Long-term Pfizer fundamentals are solid and this is something I can leverage. In other words, I am not afraid to own shares should prices go against me in a big way. This is critical to the style of trading I do; I am willing and able to own the shares if my thesis is incorrect.
Expectations on Wall Street are mixed from the ratings stand point. However, almost all expert price targets are higher than PFE’s current level.
It is trading 8% below the average price set by analysts who cover the stock. It is important to note that I am not chasing the consensus upside potential in PFE. I am betting that there is support and that it will hold for the next six months or more.
There is technical upside potential that is visible on the monthly chart, but that would be a write up of a different kind. Today, I concentrate on raising cash out of thin air.
Bottom Line on PFE Stock
The trade: Sell the PFE Mar 2018 $33 naked put for 60 cents per contract. Here, I have 85% theoretical odds of earning maximum gains. However, if the price falls below my strike, then I would own the shares and would gather losses starting at $32.40 per share.
Those who want to mitigate the risk that comes with selling naked puts can sell a spread instead. There, the maximum loss is much smaller.
The safer trade: Sell the PFE Mar 2018 $33/$31 bull put spread. This too is a bullish trade, but with smaller dollars at risk. If it wins, the spread would still yield 15%. Compare this with needing to risk face value of the underlying stock, then hope for an equal rally just to match the performance of the spread.
Regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.