Monday, October 31, 2016

PFE Analysis

Update 11/18/2016: PFE reached half of its potential profit and I exited.

Shares declined by 0.7% over 18 days, or a -13% annual rate. The options position produced a 100.0% yield on debit for a +2,028% annual rate

The pharmaceutical house Pfizer Inc. (PFE), headquartered in New York City, publishes earnings on Monday before the opening bell.

[PFE in Wikipedia]


I shall use the DEC series of options, which trades for the last time !# days hence, on Dec. 16.


Implied volatility stands at 26%, which is 1.5 times the VIX, a measure of volatility of the S&P 500 index. PFE’s volatility stands in the 67th percentile of its annual range. The price used for analysis was $31.65.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

The Trade

PFE has been on the decline since Aug. 1; in Elliott wave analysis, a 4th wave sideways movement within a rise since February 2009 that suggests range trading within around $27.50 and $40.

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PFE is rated neutral by Zacks Investment Research no with changes in the Street's expectations that would suggest an earnings surprise.

Brokerages are slightly negative about PFE's prospects, collectively coming down at a negative 8% enthusiasm rating, with 46% of 13 analysts issuing strong buy recommendations.

The stock's price has risen immediately after one of the last four earnings announcements.

Based primarily on the chart analysis, and the lack of persuasive evidence suggesting the contrary, I shall structure the proposed trade as a direction-neutral position.

Iron condor, short the $33 calls and long the $34 calls,
short the $29 puts and long the $28 puts,
sold for a credit and expiring Dec. 17.
Probability of expiring out-of-the-money

The premium is $0.30, which is 30% of the width of the position’s wings.

The risk/reward ratio is 2.2:1.

The zone of profit in the proposed trade covers a $2.00 move either way. The biggest immediate move after each of the past four earnings announcements was $3.66, and the average was $1.56. After eliminating the maximum and minimum post-earnings movements, the central tendency is $0.88.

Decision for My Account

I have entered a position on PFE as described above. The stock at the time of entry was priced at $31.80.

-- Tim Bovee, Portland, Oregon, Oct. 31, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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