In late November we bought Pfizer (PFE) stock and sold a January upside call (creating an over-write) after the stock sold off on the news of the long rumored merger with Allergen. Here was the original trade:
*Trade Idea: Bought 100 shares of PFE for $31.35 and sold 1 Jan16 33 call at .45
We were immediately correct on direction of the stock but almost too tight on the selection of the call sale as the stock quickly was above $33. We weren’t worried though as we felt good even if the stock continued higher as we’d add more to the profits (even above the strike the position was still long delta) and if the stock pulled back under the strike the short call premium would come in and protect (somewhat) against a move lower in the stock. We updated the trade with our thoughts:
The stock has indeed bounced off that initial reaction and is now slightly above our short strike. The stock is obviously a winner and the call is a loser but the overall position is profitable. Here’s how that looks with PFE at $33.35:
- Stock: +2.00
- Calls: -0.75
- Overall Profit: 1.25
Since the position is still bullish, we’re fine with the stock going higher, and since it’s aggressively hedged with a short at them money call we’re fine with it pulling back a little as it would preserve the long stock and allow us to roll at some point.
That second scenario is exactly what has happened as the stock has pulled back about a dollar. So let’s check back in on the trade:
With the stock at 32.25:
- Stock: +.90
- Calls: +.15
- Overall Profit: 1.05
So despite the stock pulling back 1.10 from the previous update the overall position is only down about .20 in profits. So it’s still working as both the stock and the short call are profitable. But it has much more potential with the stock higher into January.
Right now the short Jan 33 calls are -33 deltas. That’s against the 100 delta long stock so the overall position is +66 deltas. That means our biggest risk is lower and the short calls at only .30 won;t be of much help if the stock were to go much lower. So we’ll have to keep a stop in the stock at around where we bought it. If the stock was 31.35 we’d have small profits from our short call and be even on the stock, it’s disciplined to sell out of the position at that point. On the upside we still have a lot of room and if the stock were to creep up to the short strike in the next 2 weeks we may even look to roll it out and up, perhaps selling the February 34 call with the stock near $33. Ot we could just take the money and run.
We’ll be sure to update on the site with either scenario.