Home Articles Options Writer Series — Fear Creates Opportunity, PFE

Options Writer Series — Fear Creates Opportunity, PFE


By Warren Kaplan

The Stock Option Writer

© Warren Kaplan 2011-2014

November 7th, 2016

During times of fear and uncertainty, stocks prices make wide moves. Emotion  overrides common sense in the stock market and politics  Opportunity abounds. If Hillary wins, the fear of restricting and crushing drug company profits by such stewards as Senators Bernie and Warren has brought down Pfizer to what I believe is a great buy level. With a great $.30 quarterly dividend, the annual yield is now 4.00% to new buyers at $30.00. Since 2009, the company has raised its dividend every year and I believe that in January 2017, the company will again raise its dividend to the $.32-$.33 quarterly area.  Senators Bernie and Warren hate any companies that make a profit. If Hillary wins, I just hope she dumps those ideas but meanwhile the stock market and investors fear them. I believe sanity will reign and so I am establishing positions in Pfizer (PFE) by writing puts.  The greater the panic, the more put premium I can take in.  If the stock price takes a huge drop, I may consider buying long term calls for a trade. I don’t recommend anyone else to do that because I am involved in the stock market all day, everyday. If I bought a call, the idea would be to hope for a rally and then sell the call. If I write an investment put, the idea is to acquire the stock at a lower than current price and eventually sell covered calls thereby increasing my total return on my investment. 

If The Donald wins, I expect the drug stocks to have a strong run from their current prices.  Hopefully I get many puts sold on Monday and Tuesday receiving the premiums I want. It is all a matter of perception.

I consider Monday and Tuesday to be battlefield conditions as to stock prices. Most people will probably do nothing as they await the outcome. There should be pockets of opportunities for full time investors like myself. 

Meanwhile, PFE is expected to have sales of $50 billion in 2016. Long term debt since 2009 has been reduced from roughly $43 billion to under $29 billion by the end of 2015.  If Senators Bernie and Warren, prevail, then it will not pay for drug companies to pour a lot of money into research as their returns would be very limited.  Everyone knows that drug research is a costly venture and why take the risk? Still, PFE at $30.00 and yielding 4.00% is very compelling.  By the way, I voted for Hillary. Emotion, not logic.

PFE ($30.00).  Currently you can write  puts at $30.00 that expires this Friday (Nov 11) and receive $.64. That is like receiving $33.28 a year ($.64 X 52). That is a potential annualized return of 111.3%. That is the benefit of fear in the market.  You could have sold $29.00 puts this past Friday and have received $.25. That is equal to $13.00 a year. That is a 44.83% annualized return.  For a date of November 18, 2-weeks, you could have gotten $.75 for a $30.00 put (annualized return of 65%) and $.34 for a $29.00 put (annualized return of 30.80%).  Note that the high-low stock price for PFE for the last 12-months is $37.39 - $28.25.  December 16, 2016 $30.00 puts can be sold for  $1.00 (28.89% annualized return) and the $29.00 December 16, 2016 put can be sold for  $.58 (annualized return of 17.33%). For extra safety, you can receive $.33 for a December 16, 2016 $28.00 put (for annualized return of 10.21%). At $28.00, the current dividend represents a yield of 4.29%. I expect the next ex-dividend date will be around Feb 8, 2017.

It should be noted that the further out you go in time, the more premium money you will receive as your risk of getting put is greater.  So, if you are willing and really want to get put (buying the stock), you should consider a longer-term option. You will get more money but a lower annualized premium return.  January 20, 2017 puts can be sold for $1.26. The annualized return on the money you need to post ($30.00-$1.26 = $28.74) is approximately 20.54%. And the January 19, 2018 puts can be sold for $3.10. If you get put on that contract, your cost is really $26.90 and I expect PFE would raise the dividend again in 2018 to the $.35 quarterly area. The January 19, 2018 puts at $28.00 can be sold for $2.25. If you got put, your cost for PFE is reduced to $25.75. Do note that when ever a stock goes ex-dividend, the market price of the stock is marked down by the amount of the dividend.  Hence, I expect that in total, PFE will be marked down by approximately $1.28 in 2017. If you have sold covered calls and the strike price is out of reach, then the mark down is really good for you as your shares will not get called away and you can write more covered calls and take in more money.

Low exposure price options (out of the money options) bring smaller premiums but more safety as to principal. Many times I try to defer assignment of an option by writing spreads. The price that is acceptable to me depends on several factors including the dividend rate and the ex-dividend date. And the chart pattern of its pricing. One secret of my success is that I use option premiums as yield enhancements. 

There are other drugs stocks to consider such as Lilly, LLY; Merck & Co, MRK and other USA based drug companies. A good drug ETF would have foreign drug companies out of the domain of Senators Bernie and Warren.


warrenkaplanWarren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner.  He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”

Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone.  This article was written for informational purposes only.