Today we share an income-generating options trade on a healthy-dividend blue-chip pharmaceuticals company. The trade not only generates compelling premium income and gives you a shot at selling the shares at a solid gain in less than 1-month, but it also gives you a chance to capture the dividend payment if the shares don’t get called away from you before the ex-dividend date in a little over 1-week from today. Also very important, we like this healthy-dividend company as a long-term investment, and we wouldn’t mind holding on to the shares if they don’t get called away. This is an attractive trade to place today and potentially over the next few trading sessions.
Pfizer (PFE), Dividend Yield: 3.8%
Pfizer Inc. (PFE) is one of the world’s largest pharmaceutical companies with annual sales of more than $40 billion. And the company expects to register strong growth throughout the remainder of 2021 and into 2022. Furthermore, Pfizer expects to produce nearly 2 billion doses of the COVID-19 vaccine in 2021, boosting previously expected output by more than 50% in response to surging global demand. You can read our previous full report on Pfizer here.
PFE Share Price. Source: YCharts
The Trade:
Buy Shares of PFE, Sell Call Options on PFE with a strike price of $42.50 (~3.5% out of the money, it currently trades at ~$41.05), and an expiration date of August 20, 2021, and for a premium of at least $0.38 (this comes out to approximately +11.1% of extra income on an annualized basis, ($0.38/$41.05 x 12 months (annualized)). Furthermore, this trade not only generates attractive premium income for us now, but it gives us the possibility of also capturing the large PFE dividend as long as the shares don’t get called away from us prior to the ex-dividend date on July 29th. The dividend payment is $0.39, which equates to 17.6% of extra income on an annualized basis ($0.39/$41.05 x (12 months (annualized)), and it can actually be higher if you exit this trade prior to expiration.
Further still, in our view, PFE is an attractive long-term investment, so if the shares don’t get called we’d be happy to keep them. And if the shares do get called we still get to keep the premium income we generated for selling the calls and possibly also the dividend income. Plus, if the shares do get called then that frees up our capital to move on to another “dividend capture covered call” trade. This trade will net us significant extra income on our $41.05/share investment. Rinse and repeat.
Your Opportunity:
We believe this is an attractive trade to place today and potentially over the next few days as long as the price of PFE doesn't move too dramatically before then, and as long as you’re able to get your arms around the workings of this trade as well as generate annualized premium that you are comfortable with. Also very important, you need to implement this four days prior to the ex-dividend date (the date the shares begin trading without the dividend) because it takes T+3 days to settle. That means you should execute this trade THIS week.
Our Thesis:
Again, our thesis is basically that PFE is an attractive long-term high-income investment trading at a reasonable price. Furthermore, the income generated by this trade (i.e. upfront premium income + the possibility of receiving the dividend) is also attractive. If the shares get called before the ex-dividend date—we’re moderately happy, if they get called after the ex-dividend date—we’re even more happy, and if they don’t get called at all—we’re happy to keep owning this attractive long-term income investment.
Important Trade Considerations:
Two important considerations when selling put options are contract sizes and earnings announcements. With regards to options contracts, they trade in lots of 100, so you need to be comfortable purchasing 100 shares of PFE in your account—which is amounts to ~$4,105.00 considering PFE trades at around $41.05/share. Secondly, it’s important to pay attention to earnings announcement dates because this is often when new news comes out that can move the stock price significantly thereby impacting your trade. And in this case, PFE is expected to announce earnings around July 28th, which is BEFORE this trade expires. This adds some uncertainty volatility to this trade, but we are comfortable that the income potential outweighs the earnings uncertainty risk.
Conclusion:
Pfizer is an attractive long-term dividend investment. The dividend is steady (it has actually increased 11 years in a row), and we wouldn’t mind owning the shares. Further, the share price has been rising in recent trading sessions thereby adding to the attractiveness of this trade from a technical standpoint.
The annualized premium (and potentially dividend) income on this trade is compelling, and repeating this type of trade can lead to significant regular income payments. Importantly, PFE is an attractive long-term income investment in its own right. Overall, we view this trade as an attractive opportunity if you are an income-focused investor.