Pfizer (PFE) – Called Away in Buy-Write

by CC July 15, 2016 12:16 pm • Commentary• Trade Ideas

Back in November we identified Pfizer (PFE) as a good candidate for a super charged yield play. The idea was that we could buy the stock, and continue to roll an over-write (selling an out of the money call vs long stock) thereby collecting the dividend, collecting short call premium, and ideallly making a little money in the stock. We’ve done that roll a few times and it’s worked well. (read here for the history of updates). Today marks the first time that the stock has broken higher than the upside call we sold into expiration. That makes sense with the market having broken out to new highs. But it means that the buy-write comes to an end unless rolled again as the short call now in the money means being called away in the long stock. So let’s look at the entirety of the trade for those that are just fine with that (like us).

The last call sale was the July 35 calls at .40 vs a cost basis at the time of 30.25. That means with the stock now trading above that strike at 36.70 that locks in the sale of the stock at 35.40 for a total gain of 5.15 or 17%. Not bad.

So as far as trade management those that are finished with the trade can simply be called away after today’s expiration, locking in that 17% gain.

For those that want to stick with the trade it’s a little tricky in that you could cover the short July 35 call and sell the August 37 call at .45. Covering the short call at a loss raises the cost basis on the position by 1.30. But there’s a dividend in early August of .30, and the sale of the call at .45 means the potential of adding .75 in yield combined, getting back a decent amount of that higher cost basis. That’s not the worst roll in the world for those that want to continue with the position as a core holding but it does run the risk of being quickly called away again on the upside if the stock were to continue this move higher.

We’re going to let the position be called away for the 17% gain and look for another opportunity in this stock of similar.