Pfizer has been a strong performer this year. Plus, the stock is sitting just above the 50-day moving average. In fact, PFE stock is up over 13% in the past three months compared to the S&P 500 Index which is down around 5%.
According to IBD Stock Checkup, PFE stock ranks No. 1 in its group and has a Composite Rating of 99, an EPS Rating of 89 and a Relative Strength Rating of 93.
PFE Stock: Setting Up A Covered Call
Income investors can further enhance the yield on the stock through the use of covered calls. Let's look at how a covered call trade on PFE might take shape.
Buying 100 shares of PFE would cost around $5,310 and the stock is yielding around 3.0% or $1.60 per year.
A June 17-expiring 53.50 strike call option traded Tuesday around $1.15, generating $115 in premium per contract.
Selling the call option generates an income of 2.2% in a few weeks, equaling around 50.5% annualized. That is in addition to the 3.0% annual dividend yield.
Risk Vs. Reward
If PFE closes above 53.50 on the expiration date, the shares will be called away at 53.50, leaving the trader with a total profit of $155 (gain on the shares plus the $115 option premium received).
That equates to a 3% return, or 68.1% on an annualized basis. Of course, the risk with the trade is that the PFE stock might drop, which could wipe out any gains made from selling the call.
Investors looking to increase their income can use covered calls on high dividend stocks. We looked at a similar idea last week on Johnson & Johnson.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
