Schaeffer's Trading Floor Blog

The Post-Earnings Disappointment Facing Pfizer Inc. (PFE) Bulls

PFE is lower today after reporting a first-quarter revenue miss

by 5/5/2014 11:37 AM
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Pfizer Inc. (NYSE:PFE) calls were in high demand in the week leading up to this morning's quarterly earnings announcement. At the International Securities Exchange (ISE), for example, more than 21,000 calls have been bought to open over the past five sessions, compared to fewer than 1,100 puts, resulting in a top-heavy call/put volume ratio of 19.98.

Incorporating data from the Chicago Board Options Exchange (CBOE) and NASDAQ OMX PHLX (PHLX) -- and expanding the time frame to two weeks -- echoes this bullish bias. Specifically, the stock sports a 10-day ISE/CBOE/PHLX call/put volume ratio of 3.98, which ranks in the 81st percentile of its annual range. Simply stated, calls have been bought to open over puts at an accelerated clip in recent weeks.

In the front-month series, peak call open interest resides at the May 32 strike, where 28,163 contracts currently reside. Since April 21, nearly 4,300 calls have been bought to open here, and based on present trading levels, the stock needs to rise about 6.7% to topple the strike price. Should PFE fail to make a move of such magnitude before the close on Friday, May 16 -- when the options expire -- risk for the call buyers is limited to the initial cash outlay.

However, in the weeks leading up to this morning's quarterly earnings report, the cost to purchase PFE's front-month premium has been on the rise; the stock's Schaeffer's Volatility Index (SVI) recently jumped to 24% from its April 21 reading of 19%. What's more, the current SVI ranks in the 74th percentile of its annual range, meaning premium on PFE's front-month options is expensive, from a volatility perspective.

As noted, Pfizer unveiled its quarterly results ahead of today's open. For the first quarter, the pharmaceutical concern reported a drop in both profit and revenue, although the former arrived above analysts' forecast (sales, meanwhile, fell short of consensus estimates). Wall Street has not taken kindly to the report, and at last check, PFE was down 2.5% at $29.99. This post-earnings decline has not only brought the stock south of its 200-day moving average, but also into the red for 2014.

Elsewhere on the fundamental front, traders will continue to keep an eye on Pfizer Inc. (NYSE:PFE), which last week offered $106 billion to acquire sector peer AstraZeneca plc (ADR) (NYSE:AZN). Although AZN squashed the proposal, rumors are now circulating of a potential hostile bid.

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