Update – Over-writing New $PFE Prescription

by CC May 9, 2016 3:01 pm • Trade Updates

In late 2015 we initiated a long term long position in Pfizer (PFE) with the idea that we could own something that was unfairly punished on the merger announcement with Ireland based Allergan. We wanted to own the stock and sell upside calls versus the long. That, in a addition to the dividend could set-up for a nice long term own with supercharged yield. Here was the original trade from Nov 22, 2015:

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

Those Jan 33 calls expired worthless and the the stock languished in the early months of 2016 and was below our purchase price for a while. But considering what’s happened to biotech and pharma in 2016 PFE held up pretty well. Which was our original thought that it would outperform, and hold up decently on the downside.

It then got a boost when the company was forced to give up on the Allergan inversion amidst pressure from US officials. The stock rallied on PFE walking away from the deal. That gave us an opportunity to sell another upside call in early April:

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

Those calls also expired worthless. The reason why we didn’t re-overwrite the trade in the time between those tow trade updates was with the stock lower we didn’t want to be too aggressive in capping potential profits. And that proved to be correct as that move on the Allergan deal falling through could have easily caused us to be called away in our long stock with too low of a call sale. Being able to sell the 33 calls with the stock back above our purchase price allowed us to continue our strategy. It also allowed us to collect the quarterly dividend in early March of $0.30. The April weekly 33 calls also expired worthless, meaning to this point we’ve been able to add $.80.

Screen Shot 2016-05-09 at 12.42.18 PM
1 yr PFE from LiveVol Pro

Now with another dividend around the corner (May 11th, $0.30) we want to roll the overwrite back out, collect the dividend and continue to try to supercharge this yield play. So here’s the latest update:

vs 100 shares of PFE (33.95) with a cost basis of 30.25, Sell to open the July 35 call at 0.40

Rationale – This is a similar strike selection as we’ve done with the stock lower and for a similar potential yield if it too expires worthless. So far we’ve been able to add about 2.5% in yield from the over-writes and the 2 dividends will have added about 2%. That’s on top of the stock being higher. So all in all it’s a long that’s been working and we’ll try to keep it going. If we’re called away in the stock above the 25 strike we’ll be more than willing to take the profits and be happy. Of course selling this upside call in no way acts as a significant hedge as it’s only lowering the cost basis by .40. So for those looking to protect this would have to be in the form of a collar, with the upside call financing the purchase of a downside put. (e.g. The July 33 puts vs the July 35 calls) But that’s something we’re not doing here. We would however consider that strategy if we still owned the stock near its highs.