Income investors tend to gravitate towards covered calls, and blue-chip high yielding stocks are a great place to start.
Pfizer (PFE) has been a strong performer in the last week and is up 9.83% in that time.
PFE also pays a hefty dividend with the current dividend yield sitting at 5.93%.
Using options, we can generate an additional income from high yielding stocks via a covered call strategy.
PFE Covered Call Example
Let’s look at two different covered call examples on PFE stock. The first will use a monthly expiration and the second will use a seven-month expiration.
Let’s evaluate the first PFE covered call example. Buying 100 shares of PFE would cost around $2,816. The June 21, 29 strike call option was trading yesterday for around $0.46, generating $46 in premium per contract for covered call sellers.
Selling the call option generates an income of 1.66% in 46 days, equalling around 13.18% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 29?
If PFE closes above 29 on the expiration date, the shares will be called away at 29, leaving the trader with a total profit of $130 (gain on the shares plus the $46 option premium received). That equates to a 4.69% return, which is 37.24% on an annualized basis.
Instead of the June 29-strike, let’s look at selling the December 29-strike call instead. Selling the December 29 call option for $1.79 generates an income of 6.79% in 228 days, equalling around 10.87% annualized.
If PFE closes above 29 on the expiration date, the shares will be called away at 29, leaving the trader with a total profit of $263 (gain on the shares plus the $179 option premium received).
That equates to a 9.97% return, which is 15.97% on an annualized basis.
These figures don’t include any potential dividends received during the course of the trades.
Of course, the risk with the trade is that the PFE might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 40% Sell with a Weakest short term outlook on maintaining the current direction.
Implied volatility is at 25.82% compared to a 12-month low of 18.44% and a 12-month high of 33.73%.
Company Description
Pfizer Inc. is a research-based, global biopharmaceutical company.
The company boasts a sustainable pipeline with multiple late-stage programs that can drive growth.
Pfizer markets a wide range of drugs and vaccines. Its business comprises six business units - Oncology, Inflammation & Immunology, Rare Disease, Hospital, Vaccines and Internal Medicine.
Pfizer spinned-off its Upjohn unit, its off-patent branded and generic established medicines business, and combined it with generic drugmaker Mylan to create a new generic pharmaceutical company called Viatris.
The Consumer Healthcare (CHC) segment, an over-the-counter (OTC) medicines business, was merged with Glaxo's unit to form a new joint venture.
The Consumer Healthcare joint venture with Glaxo and the merger of Upjohn unit with Mylan has made Pfizer a smaller company with a diversified portfolio of innovative drugs and vaccines.
Of the 21 analysts following PFE stock, 8 have a Strong Buy rating, 1 has a Moderate Buy rating and 12 have a Hold rating.
Covered calls can be a great way to generate some extra income from your core portfolio holdings.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
