Blue-Chip Drug Stock With Options at at Bargain

Short-term PFE options are attractively priced right now

Managing Editor
Jan 5, 2018 at 1:17 PM
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Pfizer Inc. (NYSE:PFE) stock has been on a hot streak to start the new year, notching a win in six out of the last eight sessions. There could be even more tailwinds in the coming weeks, with the Dow stock sending up a buy signal to short-term options traders right now.

At last check, Pfizer stock was down 0.2% at $36.72, but remains a chip-shot from the annual high of $37.35 it touched on Dec. 18. The equity has tacked on 10% over the last six months, with its rising 80-day moving average containing any pullbacks along the way.

The stock could be ready to hit even higher highs, if past is precedent. The equity's Schaeffer's Volatility Index (SVI) of 12% is higher than just 7% of all other readings from the past year, pointing to relatively attractive short-term option premiums amid muted volatility expectations.

In the two other times Pfizer stock has been trading near new highs while its SVI has been ranked in the bottom 10th percentile of its annual range, looking back to 2008, the shares averaged a one-month gain of 4.14%, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Plus, the stock was positive a month later both times. A move of similar magnitude this month would vault PFE stock above $38 level for the first time in 14 years.

Short sellers continue to pile on. Short interest jumped 19.3% during the last reporting period, to 59.7 million shares-- representing nearly four days' worth of pent-up buying demand, at the security's average pace of trading. Should PFE continue its recent uptrend, it could lead to a mass exodus from these shorts.

In the options pits, calls continue to be quite popular. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows PFE with a 10-day call/put volume ratio of 6.83. Not only does this show long calls outnumbering puts by a nearly 7-to-1 ratio, but ranks 5 percentage points from a 52-week high. 

Some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to Pfizer shorts seeking an options hedge. Digging deeper, however, the in-the-money January 2019 35-strike call has seen the biggest open interest increase during this time frame, with nearly 5,700 contracts added.

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