Pfizer (NYSE:PFE) is a pharma/biotech dinosaur. This stock is a survivor of decades of stock market turmoils and corrections. It currently sits on a potential long-term technical breakout point on the monthly chart. Being that this is a higher-time-frame chart, the potential breakout is not likely to be on one sharp move but rather is one that would come in slowly.
For a long while now, Pfizer stock has been setting higher lows knocking on a roofline of prices just under $38 per share. Should the bulls prevail and break through the zone, it would trigger a technical breakout that would invite more buyers.
This pivot zone dates back to 1998 so it is a long fought battle. In 2004, PFE stock fell off that ledge to $12 per share. But since then, it rallied steadily more than 200% bringing us to that same neckline or the scene of the accident.
Pivot zones that are this significant usually are not easy to break. They tend to present resistance on the way up. But once they break the bulls should overshoot higher. And therein lies the opportunity.
Historically, Pfizer stock is not a superstar. It is flat for the year and lags the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) over the last five years, 25% to 70%.
Since this particular breakout will be a slow motion move, I am not one to buy the shares outright and simply hope for it to happen. Buying calls is even more hopium-filled in this case because of the time constraints on them.
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Because of the consistent higher lows, I am confident in the proven support levels. So I choose to sell downside risk into what others fear and let time do the work for me. This way I don’t even need a rally to profit. I merely need the stock to hold support through 2018 and I retain maximum gains.
Fundamentally, PFE is not cheap with 20 price-to-earnings ratio. Perception is that it is a boring company in need of a more exciting pipeline. To this trade, boring is beautiful since ideally I want nothing to time except time to tick by for me to win.
Recently the company raised prices so their benefit their P&L. But this could put them squarely in President Donald Trump’s line of fire. The president has made known his mission to force pharma companies to lower drug prices but for now there are more pressing matters occupying the White House.
Nevertheless, the headlines still loom.
PFE Stock Trade Idea
The Trade: Sell the PFE Jan 2019 $33 put for 65 cents per contract. Here I have a 85% theoretical chance of success. Otherwise and if the price falls below it then I would suffer losses below $32.35.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the PFE Jan 2019 $33/$31 bull put spread. Here my risk is smaller yet the spread would yield 18% on risk. Compare this with risking 36 to buy the shares and leave no room for error.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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