An Options Play on Pfizer's Headline News

Pfizer is double dipping into the headlines this morning. The big attention grabber is the announcement that the company will split into three units: Innovative Medicines, Establish Medicines, and Consumer Healthcare effective at the start of fiscal 2019. Currently, the company is split into two units: Innovative Medicines and Essential Health.   It's no secret Pfizer is seeking to sell or spin off its consumer healthcare business, which consists of things like Advil and lip balms. This segment of the business is thought to be worth around $15 billion. Combined with the Innovative Medicines business, the two divisions account for around three quarters of the company's revenue.   The new Established Medicines unit will include the majority of the company's off-patent brands as well as some generic drugs, while the Innovative Medicines will include a new hospitals division.   A split of units will grab headlines, but I don't see it doing much for the stock in the short run. It's probable we'll get a clearer vision as to the strengths and growth areas of the company, along with the increased potential on when and whether the Consumer Healthcare business could finally be sold. I'd be more excited about actual spinoffs here, similar to what we've seen in the past with veterinary businesses.   This announcement comes a day after the company announced if would defer price increases after discussions with President Trump. Trump blasted Pfizer on social media shortly beforehand. Pfizer has stated it wants to give Trump an opportunity to work on his blueprint to strengthen the healthcare system, but it did include a timeline. The deferment will last until either the president's blueprint goes into effect or the end of the year, whichever is sooner.   View Chart »  View in New Window »   As trade wars continue to amp up market volatility, more conservative names like Pfizer are finding buyers. The technical setup on the weekly price action is terrific. Shares have been trending higher since the big drop to start the year. Unfortunately, we're not at a buy point today. The best risk-reward has been to buy the stock at support -- currently $35 -- or to buy a breakout -- currently $37.50. The breakout would be on a weekly closing basis, not intraday or even intra-week, so it requires more patience from a trader.   The only thing I would consider here is a buy-write, if I didn't own the stock. The out-of-the-money put premiums aren't anything that get me too excited, so I'm not sure I'd pursue that with the stock at these levels.   If I were intent on getting into the name here's how I would approach it.   The Trade: Buy to open 100 shares PFE at market (currently $37.28); sell to open 1 August 17 $38 call at $0.31.   --Net Cost $3697; --Max Risk $3697; --Max Reward $103; --Breakeven $36.97; --Intrinsic Value $31; --Days until expiration: 37.   The company is set to pay a dividend on August 2 of $0.34, so after that date, the max reward will increase by the amount of the dividend and breakeven will be reduced by the same amount.
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