The Signal That Could Spell Trouble for Pfizer Inc. (PFE) Option Bulls

Call buyers are piling on Pfizer Inc. (PFE), with the stock on track for its biggest weekly gain since March 2009

Nov 10, 2016 at 12:16 PM
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Drugmaker and Dow component Pfizer Inc. (NYSE:PFE) is trading 5% higher at $33.73 -- the leading gainer on the blue-chip index so far -- following news the company's top breast cancer treatment, Ibrance, received approval from the European Union. Also boosting the shares are reports Pfizer may sell or spin-off of its consumer health business, worth an estimated $14 billion. Along with Wednesday's post-election sector surge, today's gains have PFE stock up 12.5% for the week -- on track for its biggest weekly climb in more than seven years. But while option bulls will likely be cheering today's price action, this hefty weekly advance may not be such a positive signal for the weeks to come.

Drilling down on PFE's weekly returns going back to 1980 -- courtesy of Schaeffer's Senior Quantitative Analyst Rocky White -- show the stock has posted a weekly gain of 10% or more 18 times. And in general, this is a signal that seems to bode ill. In the week following such a large gain, PFE has lost an average 1.8%, compared to an average weekly anytime gain of 0.3%. Moreover, the stock has been positive just one-third of the time one week out. What's more, this underperformance has historically extended to the subsequent two- and four-week time frames. Perhaps even more troubling, PFE has tended to return smaller gains and larger losses following this signal. Simply said, PFE shareholders may want to brace from some tough weeks ahead.

PFE Weekly Returns since 1980

In today's trading, PFE calls are changing hands at four times the typical intraday rate, and with 71,488 contracts on the tape -- call volume is on track to finish in the 98th percentile of its annual range. Leading today's action is the November 33 call, with the International Securities Exchange (ISE) confirming at least some buy-to-open activity has occurred. Buyers of the call are looking for PFE to extend its rally beyond the $33 mark through next Friday's close, when the front-month series expires.

Notably, the November 33 call is also home to peak open interest for the front-month series, with 44,362 contracts outstanding. Although PFE is trading north of the strike currently, the $33 mark is a familiar area of trouble for the stock. Specifically, it shut down PFE rally attempts last December and again in April.  

Taking a step back, call buying has been a popular strategy in PFE's options pits. At the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have initiated more than five long calls for each put over the last 10 sessions. Moreover, the resulting call/put volume ratio of 5.34 rests just 3 percentage points from a 12-month high.

The brokerage bunch doesn't seem to be on board with this bullish outlook, however. More than half of the firms following PFE rate the shares a tepid "hold." Plus, the stock received a round of bearish analyst notes just last week, after quarterly earnings came in below expectations.

Overall, Pfizer Inc. (NYSE:PFE) has done little to impress in recent months. Since peaking at a 12-year high of $37.39 in August, the shares have shed roughly 10% of their value. With today's gains, though, the stock is back in positive year-to-date territory, and north of its 10-week moving average for the first time since mid-October.

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