Bulls charging toward big pharma

Suddenly the bulls see something they like in pharma.

Drug stocks, along with most health care names, went on sick leave between early March and the end of May. But they’ve been showing back up to work this month as investors hope for positive government policies and hunt for value. Get this: It’s now even poised to take the lead as the top sector as the second quarter draws to a close.

Pfizer (NYSE: PFE) is health care’s second-biggest name behind Johnson & Johnson (NYSE). It’s lagged for years -- literally since mid-2013 -- but yesterday options traders looked for the drug giant to play a very quick game of catch-up:

  • Going to work less than an hour into the session, they bought 22,500 July 35 calls for $0.08.
  • A matching number of July 37.50 calls were sold at the same time for $0.01.
  • Owning calls fix the price where investors can purchase a security. Selling them generates income, which can lower cost and therefore increase returns on a percentage basis. But it also forces them to deliver stock if a certain level is reached. For those of you who didn’t do your homework, this is known as a bullish call spread, or a vertical spread.
  • In this case, they locked in the right to buy PFE for $35 through Friday, July 21. They’re also on the hook to exit at $37.50 if it’s above that level. 
  • In other words, they stand to collect $2.50. And they paid just $0.07 for that right – a potential profit of 3,471 percent from PFE moving just 10 percent. This guy could teach Archimedes a thing or two…
  • But there is risk because the position will expire worthless if the stock remains below $35. Breakeven is at $35.08.
Pfizer (PFE), 1-yr chart

Source: OptionsHouse by E*TRADE

PFE ended the session up 0.95 percent to $33.88. Analysts haven’t been thrilled with the stock’s penchant for missing their revenue forecasts,1 and could point to few company-specific catalysts to explain its strength.

Veteran traders, however, know that sentiment isn’t always so black-and-white. Worries about political risk are now being dismissed as too fearful,2 and money has been looking for a new home as it leaves technology stocks. There have even been signs of increased merger activity in the health care space.3

Chart watchers focused on PFE’s price history. After all, it peaked near $35 in March. A break through that resistance, they contended, and the stock might keep running to the old high near $37.50, which would closely match the levels in Wednesday’s vertical spread.

There were a couple of other seemingly bullish trades among some big biotechs:

  • Amgen (NASDAQ: AMGN): A block of 2,500 September 185 calls were bought for $1.73. AMGN, another former champ that’s been reeling from a beat-down in March,4 rose 3.04 percent to $171.35.
  • Celgene (NASDAQ: CELG): Traders exited 2,000 September 145 calls and rolled their money into the October 150 calls, paying a net $0.11 in the process. CELG ripped 5.24 percent to $132.83.

Bottom line: Money has been moving to-and-fro all June, and has been a shot in the arm for a flock of pharma stocks.


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1. Reuters: Pfizer cholesterol drug fizzles, hitting shares. 11/1/16. Marketwatch: Pfizer's stock drops after profit miss, downbeat sales outlook. 5/31/17. Reuters: Prescription for growth at Pfizer? Analysts say deals. 5/2/17. Benzinga: Citigroup Downgrades Pfizer to Sell. 5/16/17.

2. New York Times: G.O.P. Rift Over Medicaid and Opioids Imperils Senate Health Bill. 6/20/17. New York Times: Draft Order on Drug Prices Proposes Easing Regulations. 6/20/17. CNBC: Biotech stocks are on fire as Obamacare repeal vote looms. 6/21/17.

3. RTT News: PerkinElmer To Buy EUROIMMUN For About $1.3 Bln Cash; Backs FY17 Outlook. 6/19/17. RTT News: Stryker To Acquire NOVADAQ For $11.75/shr - Quick Facts. 6/19/17. Marketwatch: Parexel to be bought in a $5 billion deal by Pamplona Capital. 6/20/17.

4. Business Insider: Amgen is getting whacked after disappointing study results for its $14,000 heart drug (AMGN). 3/17/17.