Update: $PFE – Cuz I’m the Taxman

by Dan April 6, 2016 11:29 am • Trade Updates

Back in late November, the day the long rumored buyout/merger agreement between Pfizer (PFE) and Ireland based maker of Botox, Allergen (AGN) was announced, I said the weakness in PFE leading up to the deal made the stock a good buy regardless of a deal outcome (read here). It was also our view that the increase in options prices leading up to the deal presented an opportunity to overwrite (sell calls against long stock) to add further yield to its existing 30 cent a quarter dividend that at current prices yields 3.7% annually.

This week’s news flow from the U.S. Treasury, rumors of risk to the deal and today’s acknowledgement that PFE is in fact walking away from the deal, has caused PFE to rally 7% in a straight line, placing the stock at new 2016 highs, and right at its 200 day moving average:

PFE 1yr chart from Bloomberg
PFE 1yr chart from Bloomberg

To refresh, here was our initial trade from November 23rd:

Trade Idea: Bought 100 shares of PFE for $31.35 and sold 1 Jan16 33 call at .45

The Jan 33 call obviously expired worthless, so the premium received lessened our cost basis to $30.90, and when you add in the quarterly dividend of 30 cents paid on March 2nd, the cost basis is actually $30.60.  So with the stock today trading at $32.50 we have a profit of $1.90, or 6%.  Not bad, but it makes sense to once again sell some out of the money calls against the long position to once again reduce the cost basis and add some potential yield.  

Update: Against 100 shares of PFE ($32.50) with cost basis 30.60, sell 1 of the April 29th weekly 33 calls at .35 cents.

New Break-Evens:

Profits: of stock up to $33, at $33 or lower receive the .35 cents in premium. If stock nearing $33 at expiration would likely cover the short call to keep the long position in place.

Losses: of stock below current levels, but the .35 premium received for the call sale will act as a small buffer.

The stock will go ex-dividend of 30 cents on May 4th and will likely pay first week of June. Earnings are May 5th and these calls expire beforehand, which will allow us to position differently into the earnings event, possibly with protection.