Pfizer (NYSE:PFE) is an old-school drug company that is not usually prone to headlines relative to the sector. In fact, PFE stock is borderline boring. Case in point? It closed perfectly flat on Monday. But last week it made headlines that also moved markets when it announced positive news regarding its clinical trials for Covid-19 — the disease caused by the novel coronavirus — on 24 patients.
Not only did it rally hard on the day, but the entire stock market also spiked on the news. Clearly the virus remains a concern on Wall Street despite the prevailing sentiment among traders. It’s uncharacteristic of Pfizer to blurt out updates, so they must be really excited about their progress.
This is great news for the company and humanity, especially if you believe the experts who are confident that having a vaccine is a matter of when, not if.
Unfortunately, Pfizer’s stock is still mired 25% below 2018 levels and 30% off the all-time highs. Clearly, this is not a momentum stock. PFE stock is down 22% year to date versus the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which is setting records and up 24%. Likewise, Moderna (NASDAQ:MRNA) is up a whopping 300% in 2020. This morning, Novavax (NASDAQ:NVAX) is up 34% on its own vaccine funding news.
This is all the proof I need to choose a strategy to trade Pfizer using options and not the equity. That way I can capitalize on its value, rather than the need for a rally. Pfizer is old and well-established, so it does not carry much systemic headline risk relative to itself. Unlike younger companies in its sector, its value is diversified enough to where a worst case scenario is not necessarily a complete catastrophe.
The Best Asset for PFE Stock Is Its Value
This makes it ideal to generate income by selling risk against proven support. In this case, the trade for PFE stock is to sell puts into year-end and let time do the heavy lifting. For example, as of the close on Monday, investors could sell the January PFE $30 put and collect $1.30. This trade breaks even at $28.7 per share. It has an 85% theoretical chance of success and leaves a 17% buffer from the current price.
The second step of this strategy would be to buy it to breakout if and when it happens, but not before the bulls breach the descending lower-high trend. This is not an imminent event; therefore, it will require patience. Meanwhile, today’s trade will generate income while this is happening. This is a clear case where boring trades are beautiful, especially when uncertainty is this high and the stock is this sluggish.
Fundamentally, owning PFE stock is a relatively safe investment, even at these prices. It carries a modest price-to-earnings ratio of 12X. Moreover, the price of the stock is just three times its book value and 3.7 times its full year sales. While the Covid-19 vaccine will help with the bottom line, the company can still do well without it. Other companies competing to solve this virus riddle absolutely need the vaccine to thrive. Yet companies like Moderna and Novavax are hogging the headlines and the bids on Wall Street. Investors took NVAX stock up almost 1,100% since February and it is up almost 2,000% this year and more this morning. NVAX almost got de-listed last year, so there is a lot of hopium hanging on its success this year.
Investors Overly Focused on New-comers
As noted earlier, Pfizer’s stock is not too impressive. I wrote an article to buy it two years ago, and while it rallied 30% thereafter, it gave it it all back up and then some. No one accused Wall Street folks of being reasonable. They trade hype to extremes for as long as they can. Eventually, the numbers have to match the expectations and reality has to set in. For PFE, the risk from enthusiasm evaporating is compared to its competitors, so it is ideal to trade using options.
Buying shares for the very long term could also work, but today’s investors are generally impatient. The old school of buy-and-hold is out of favor, especially in the era of Robin Hood traders controlling the markets. It is much safer to bank on proven support than buy into hopium that may or may not come to fruition.
I mention this because we have never had a successful vaccine for a coronavirus. Yet, the experts now tell us that it is a certainty and that it’s not a question of if, but when. I am always leery of such confidence, especially when the process is this lengthy and when we all know that viruses are unstable. It’s not like the scientists are chasing a static foe, these things mutate. While I am optimistic that we will get past Covid-19, I think it will be more so from innate human resilience and not from a medicine. The vaccine will help sentiment, but more bodies will develop ways to deal with it from within.
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.