As one of the world’s top pharmaceutical firms, Pfizer (PFE) is liable to see significant movement in its share price based on key fundamental data. However, once the much-anticipated event has passed – in this case, its third-quarter earnings report – the market’s expectation for volatility subsides. That makes it difficult to profit from PFE stock in the open market. Therefore, I view PFE stock as a Hold, but that’s not the entire story.
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Last week, Pfizer revealed its Q3 results, much to the delight of analysts. In particular, the pharma giant posted a 32% year-over-year growth in operational revenue. The company attributed its performance to “focused commercial execution” and solid top-line growth across its product portfolio. Even better, management raised its full-year guidance for sales and earnings per share.
Not surprisingly, implied volatility (IV), or the market’s expectation of forward movement of a particular asset, was elevated heading into the Q3 report. It wasn’t unusual for IV to exceed 30%. After the report, however, IV slipped to around 25%. With no more big news to reveal, investors don’t anticipate large swings in PFE stock. Nevertheless, such lackadaisical sentiment may open doors for a short iron condor trade.
Setting up the Framework of Pfizer’s Iron Condor
Generally, the market allows participants two main directions to wager on: bet that the underlying security moves higher (long) or moves lower (short). However, in the case of a neutral position – where you might anticipate the security to trade sideways, such as after a big earnings report – you might think that there is no way to profit. This would be an incorrect assumption.
A short iron condor allows speculators who believe that an asset will trade within a defined range to bet money on that belief. Where does this “magic” money materialize from? A short iron condor is actually a combination of a bull put spread and a bear call spread. Both spreads represent credit-based strategies, meaning that they start from a cash inflow position. This is also why this condor is “short.”
With the bull put spread, the trader wins when the security stays above a defined profitability threshold. Regarding a bear call spread, the trader wins when the security stays below a defined profitability threshold. Combine the two and you have a short iron condor. In this case, PFE stock features two “danger” zones that it cannot exceed: one to the upside and the other to the downside. Stay somewhere in the middle, and you win.
Calculating the Wings for Your PFE Stock Trade
Depending on the options chain (expiration date), there could be hundreds of ideas to choose from. However, only a few condors will actually be realistically viable. To narrow down the list, you must first establish a baseline condor, which is a condor with wide enough “wings” on either side to accommodate the market’s expectation of volatility.
You can use a stochastic formula, which involves multiplying the most recent share price, the IV of the targeted options chain, and the time decay adjustment (or the square root of the number of days to expiration divided by 365 days). For PFE stock options expiring on Dec. 20, 2024, this exercise yields a price of $2.55. In other words, from Friday’s close of $28.09, PFE may move up to $30.64 or fall down to $25.54.
The one condor that can accommodate this expected range while delivering the highest yield is the 23.00P | 25.00P || 31.00C | 33.00C trade. With this wager, PFE stock can move up to $31.16 or down to $24.84 and still not lose money (assuming no administrative fees). However, the yield of 8.7% is rather small.
Fishing for Better Ideas
If the above iron condor doesn’t sound appealing, you’re probably not alone. While an 8.7% yield in a little over a month is decent, you’re still taking a lot of risk for not much reward. If you’re willing to compromise regarding the breadth of safety with your condor’s wings, there are other, more compelling ideas to consider.
One condor that may get the speculative juices flowing is the 25.00P | 26.00P || 31.00C | 32.00C condor. With this trade, you would be putting 82 cents at risk in the hopes of keeping 18 cents of credit. This translates to a yield of 21.95%. Here, the upside breakeven threshold stands at $31.18 and the downside breakeven comes in at $25.82.
The benefit here is that PFE stock can rise 11% before the trade becomes unprofitable. However, on the downside, it can only slip 8.08% before it exceeds the allowed range of the condor. As you might suspect, the condors that provide higher yield require you to absorb greater risk (that is, the range of profitability narrows).
Is PFE Stock a Buy, According to Analysts?
Turning to Wall Street, PFE stock has a Moderate Buy consensus rating based on seven Buys, 14 Holds, and zero Sell ratings. The average PFE stock price target is $32.47, implying about 17% upside potential.
The Takeaway: Neutrality Can Pay Off with PFE Stock
Ordinarily, taking a neutral stance on a security like PFE stock might seem an unproductive exercise. Typically, an investor makes money betting on or against a tradeable asset. However, the beauty of the short iron condor is that it allows speculators to profit off neutrality. By applying a baseline calculation and then massaging the numbers, traders can find a condor play that works for them.
