Pfizer (NYSE:PFE) shares took flight on Monday after its CEO expressed optimism that a novel coronavirus vaccine would be available to the public before the end of 2020. The 2.61% gain came on a day that saw biotech stocks rip higher across the board. While the news is positive for the company, it doesn’t automatically make Pfizer stock a buy.
Upon closer investigation, the Pfizer chart still leaves room for concern.
After identifying which price levels it needs to push above before the coast is clear for bull plays, we will break down current implied volatility levels and what they suggests about the optimal options strategy to use.
Choppy Pfizer Stock Charts
Pfizer does not exactly have a reputation as a powerful momentum stock. Quite the contrary, it has been a steady mover rewarding cash flow seekers with its consistent dividend. At present, that annual payout translates to a 4.1% yield. The reliable income is one of the forces helping Pfizer stock in times of turmoil — like in March. Falling prices juice the yield, and ultimately bring buyers back. It is a phenomenon we have seen play out time and again over the past decade.
Though messy, the weekly time frame has improved since March. With Monday’s launch, Pfizer stock formed a second higher pivot low to confirm its attempts at returning to uptrend status. Technically, the rally did propel Pfizer back above its 20-week and 50-week moving averages, if only slightly. What is needed to seal the turnaround, however, is a push above the $39 resistance zone.
The past two rally attempts have died at its doorstep, making it the level to watch.
From a volume perspective, I do take courage in the patterns over the last two swings. High volume accompanied the advance, signaling a strong uptick in buying interest. By contrast, participation during the pullback was minor.
The mixed signals become even more apparent on the daily time frame. This year has been rife with see-saw price action. Consider the current posture of the three moving averages, for instance. The 200-day is flat, reflecting a neutral long-term trend. The 50-day is rising, suggesting a bullish intermediate trend. And the 20-day is falling, signaling a bearish short-term trend. It doesn’t get any messier than that.
As wonderful as 2.6% pop on Monday was, sellers emerged in intraday trading to prevent the price from holding above both the 20-day and 50-day averages. Even if we climb above these smoothing mechanisms, horizontal resistance still looms near $38 and then $39.
Here is the bottom line: The path to higher prices will probably be choppy and requires patience.
I prefer a position trade that profits from time decay. That way, if the price meanders, we can still profit.
In selecting the optimal options strategy, it helps to use implied volatility as our guide. This indispensable metric reflects whether premiums are currently cheap or expensive. In turn, we can decide if buying or selling options is best. Currently, Pfizer has an implied volatility rank of 21%. Since it’s in the lower quartile, it means options are officially cheap.
If you’re willing to lean bullish over the next, then bull call diagonals are a good play.
The Trade: Buy the Nov $35 call while selling the Oct $39 call for around $2.58.
The ideal outcome is to have Pfizer stock rise to $39 by expiration. If it does, you could capture a reward of around $100 to $140. That translates into a potential return on investment of 39% to 54%. The max risk is $258, but if you bail on a break of $35.50 support, you will only lose $70.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
For a free trial to the best trading community on the planet and Tyler’s current home, click here!