Pfizer has had a major pullback, and one investor is using a leveraged strategy in hope of a rebound.
optionMONSTER's Heat Seeker tracking system detected the purchase of 15,000 November 18 calls for an average premium of $0.85 and the sale of 30,000 November 20 calls for $0.23. Volume was more than 15 times open interest in both strikes.
The trades occurred in three blocks on Friday, a session during which the pharmaceutical giant swung wildly along with the rest of the market--at one point touching a seven-month low of $17.03. It then rebounded to close up 0.75 percent at $17.49.
The option trade is known as a ratio spread because twice as many calls were sold as were bought. That reduced the cost basis to just $0.39 and created the possibility of a 413 percent profit if PFE closes at exactly $18 on expiration. The gains will erode above that level and turn to losses past $22.
In contrast, a more common vertical spread would only earn 222 percent on a move to $20. But, it also wouldn't have any additional upside risk. See (See our Education section)
Overall option volume in the stock was twice the average level on Friday, with calls outnumbering puts by 2 to 1, according to the Heat Seeker.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
