Over the past year, pharma giant Pfizer (NYSE:PFE) in partnership with Germany's BioNTech (NASDAQ:BNTX) have been in the spotlight thanks to their successful coronavirus vaccine development. On Mar. 23, Pfizer also reported that it began an early-stage clinical trial to test an oral anti-viral drug against COVID-19.

Over the past year, PFE stock has returned close to 25%. But, so far in 2021, the shares are down about 3%.

Investors who also pay attention to technical charts would notice that in the past several weeks the stock has mostly been moving within a range of between $33.5 and $36.5.

The company is expected to report Q1 2021 earnings in late April. Its share price could be choppy around the earnings release date. However, we do not expect the stock to make a significant new leg up in the coming weeks.

Therefore, a covered call might be an appropriate strategy to protect some of the recent gains and generate income using current Pfizer holdings in a portfolio. So today we provide an example of how to set up a covered call on PFE stock. We previously discussed how investors could consider writing covered calls on their stock holdings.

Such an option strategy could help decrease the volatility of the position and offer shareholders some protection against declines in the stock. Readers who are new to options might want to revisit that article before reading this post.


Intraday Price: $35.45
52-Week Range: $26.43 - $43.08
Dividend Yield: 4.4%

Pfizer is one of the world’s largest pharmaceutical firms, with annual sales of around $42 billion. The company announced Q4 and FY20 metrics in early February. Quarterly revenue was $11.7 billion, up 12% year-over-year (YoY). Adjusted income came at $2.4 billion, up 15% YoY. Diluted EPS of 42 cents showed an increase of 14% YoY. As of the end of 2020, cash and equivalents stood at $1.8 billion.

CEO Dr. Albert Bourla said:

“Our record-breaking success at developing a vaccine against COVID-19, along with our partner BioNTech, is just one example of what we believe this new Pfizer is capable of achieving.”

CFO and Executive Vice President Global Supply Frank D’Amelio stated:

"I am very pleased with how our company performed in 2020, and particularly in the fourth quarter, where we achieved double-digit operational revenue growth driven by a wide range of products and geographies, including growth within all of our therapeutic areas."

In 2021, management expects to post $59.4 billion-$61.4 billion in revenue. The midpoint of the guidance range represents a 44% YoY growth, including an expected $1.4 billion, or 3%, favorable impact from changes in foreign exchange rates. PFE stock's forward P/E and P/S ratios currently stand at 11.14 and 4.77, respectively.

Covered Calls On PFE Stock

For every 100 shares held, the strategy requires the trader to sell one call option with an expiration date at some time in the future.

Intraday Tuesday, PFE stock was trading at $35.45. Therefore, for this article, we'll use that price.

A stock option contract on Pfizer is the opportunity to buy (or sell) 100 shares.

Investors who believe there could be short-term profit-taking soon might use a slightly in-the-money (ITM) covered call. A call option is ITM if the market price (here, $35.45) is above the chosen strike price ($35).

So the investor would buy (or already own) 100 shares of PFE at $35.45 and, at the same time, sell a Pfizer May 21, 2021, 35-strike call option. This option is currently offered at a price (or premium) of $1.25.

An option buyer would have to pay $1.25 X 100 (or $125) as a premium to the option seller. This call option will stop trading on Friday, May 21, 2021.

This premium amount belongs to the option writer (seller) no matter what happens in the future on the day of expiry. The 35-strike offers more downside protection than an at-the-money (ATM) or out-of-the-money (OTM) call.

Assuming a trader would enter this covered call trade at $35.45, at expiration, the maximum return would be $80, i.e., $125 - (($35.45 - $35.0) X 100), excluding trading commissions and costs.

Risk/Reward Profile For Unmonitored Covered Call

An ITM covered call's maximum profit is equal to the extrinsic value of the short call option.

The intrinsic value would be the tangible value of the option if it were exercised now. Thus, our PFE call option's intrinsic value is ($35.45 - $35.0) X 100, or $45.

The extrinsic value, on the other hand, is the difference between the market price of an option (or the premium) and its intrinsic price. In this case, the extrinsic value would be $80, i.e., ($125 - $45). Extrinsic value is also known as time value.

The trader realizes this gain of $80 as long as the price of PFE stock at expiry remains above the call option's strike price (i.e., $35).

On expiration day, if the stock closes below the strike price, the option would not get exercised, but would instead expire worthless. Then, the stock owner with the covered call position gets to keep the stock and the money (premium) s/he was paid for selling the option.

At expiration, this trade would break even at a Pfizer stock price of $34.20 (i.e., $35.0 - $0.80), excluding trading commissions and costs.

Another way to think of this break-even price is to subtract the call option premium ($1.25) from the underlying PFE stock price when we initiated the covered call (i.e., $35.45).

On May 21, if Pfizer stock closes below $34.20, the trade would start losing money within this covered call setup. Therefore, by selling the covered call, the investor has some protection against a potential loss in the case of a decline in the underlying shares. In theory, a stock's price could drop to $0.

What If PFE Stock Reaches A New All-Time High?

As we have noted in earlier articles, such a covered call would limit the upside profit potential. The risk of not participating in PFE stock's potential appreciation fully would not appeal to everyone. However, within their risk/return profiles, others might find that acceptable in exchange for the premium received.

For example, if Pfizer shares were to reach a new high for 2021 and close at $45 on May 21, the trader's maximum return would still be $80. In such a case, the option would be deep ITM and would likely be exercised. There might also be brokerage fees if the stock is called away.

As part of the exit strategy, the trader might also consider rolling such a deep ITM call option. The trader would potentially buy back the $35 call before expiry on May 21. Depending on her/his views and objectives regarding the underlying PFE stock, s/he could consider initiating another covered call position. In other words, the trader could possibly roll out to a June 18 expiry call with an appropriate strike.

Ex-Dividend Date

Finally, we should remind readers that Pfizer is a dividend-paying stock. It last paid the declared dividend on Mar. 5.

In late April, it is next expected to go ex-dividend, a date that matters to covered call writers. It is the first day a stock, such as Pfizer, trades without the dividend. An investor has to own Pfizer shares by the close of the trading day before the ex-dividend date in order to receive this dividend.

As the writer of the Pfizer covered call, the trader might become subject to an early exercise since the buyer of the option might want to capture this dividend.

Such an early exercise usually takes place on the day before the ex-dividend date and in the case of ITM options, which do not have much time value.

Call writers need to be cognizant of the ex-dividend date as the covered call strategy might require managing.

Bottom Line

Pfizer has recently become a household name due to its broadly used coronavirus vaccine developed together with BioNTech. Long-term, we are bullish on PFE shares. With its juicy, 4.33% dividend yield, it would deserve a place in many portfolios.

However, as the new earnings season gets under way, we do not expect a new up-move in the stock. Therefore, current shareholders could consider generating income and protecting some of their recent gains by initiating a covered call position.

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