I bought PFE March 24th 35 Calls today.
Why did I buy PFE calls when we are trading near the highs? The overall market has continued to make new highs, and I need to find new opportunities that have low risk and high reward potential. I don’t have a strong desire to bet against the market rallying overall, but I think we could have sector rotation. One sector that looks strong and could benefit from more rotation is healthcare. I believe PFE is giving an interesting setup thanks to those factors. I’ll dive into the technical setup and options markets below.
First, we’ll look at the charts. On the daily chart, one can see we are now above the 200 Day Moving Average:
Chart from FreeStockCharts.com
The 200 Day Moving Average tends to be a key for trend followers. Holding here, we should see continued money flow into PFE. If it fails, we’ll likely re-test the lows of the range around $31. This one is simple and does not need a lot of trend lines – the key inflection point for my trade thesis is the 200 Day Moving Average.
On a weekly basis, we can see that there’s good room to run here and we are above all of the Moving Average timeframes I follow:
Chart from FreeStockCharts.com
We are now testing recent highs ($33.83 made on November 10th), and if we get through this level, I would expect us to make a trending move toward the 52-week high of $37.39 over time.
I think this means we should see some upside if I can find a leveraged way to play this. We might fail at the 200 Day Moving Average, so if I’m getting into this trade, I want the defined risk of options, but only if I can also get leverage on a move above $36.
So, looking at the options, I see that Implied Volatility is near lows with a small up-tick today:
Chart from LiveVol
The Implied Volatility tends to increase when the market sells off (as is normal in equities), but given the low Implied Volatility level overall, I think we have limited downside even if the market rallies.
Focusing on the Implied Volatility levels over the last 6 months, we see the following:
Chart from LiveVol
With Implied Volatility near 14%, there’s very little downside to being long options. Additionally, a 14% Implied Volatility level shows an expectation that the stock would move ~4% in a month. In order to calculate the market’s expected one standard deviation move, we use the following formula:
If that move is to the upside, PFE would be trading $35 in a month. I think there’s potential that we overshoot that with this technical move mentioned earlier. So, I am looking for options that expire in about 1 month and play for a move above $35. Specifically, the target I mentioned earlier was $36, but I do think we could see an even bigger move given the recent overall market performance.
Let’s look at the options markets here:
Screenshot from LiveVol
The $34.5 calls give ~5-to-1 R&R on a move to $36 (risking $0.26 to make $1.24) assuming slightly better execution that having to pay the offer. The $35 calls give a ~6-to-1 R&R on a move to $36 (risking $0.14 to make $0.86) even if I pay the offer. I chose the $35 calls due to this improved leverage. If my play was a move to $35, I would see little reason to be in options as the market is implying that move. So, I want to make sure that I am utilizing an option that I can easily hold on a move toward and through $35. This is why I chose the March 24th $35 call as a new long position.
There’s no guarantee that the market will accelerate above the 200 Day Moving Average, but if the market continues to rally on the whole, then PFE should find a trend move toward $36 with a chance of making new 52-week highs. If this plays out over the next month, I get a great R&R without needing a huge move. If my idea works, I have great optionality to either close out my position or to modify my position and play for the next leg higher.
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