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Options Traders Don't Like Drugs

Tuesday, 28 Jul 2009 | 2:35 PM ET

Apparently, Nancy Reagan isn't the only one saying no to drugs. Options Traders appear to be living in an 80s PSA as well, shunning shares of Pfizer through some heavy put buying.

Case in point: huge put activity at the Dec 16-strike, as well as the Jan '11 7.5-strike, with a respective 26,000 and 21,000 contracts trading hands today.

On a day when the market's are jittery, you'd think investors would be popping pills like Elvis. But both Pfizer and Merck are off significantly.

The National Institutes of Health stopped a trial of Pfizer's sildenafil (AKA Viagra) as treatment for pulmonary hypertension with sickle cell patients (who knew). But market watchers say it's not Viagra concerns that are keeping Pfizer down.

"The Sildenafil issue today have nothing to do with the selloff," said Robert Hazlett, analyst over at BMO Capital Markets (OUTPERFORM). Instead, Hazlett points to a much simpler reason.

"The sector as a whole has had a huge run," said Hazlett. "And with uncertainty coming out of Washington, it would make sense that you would see some profit taking."

On Friday's show, Scott Nations, President and Chief Investment Officer of NationsShares (and Bill Clinton's doppelganger) recommended buying calls as a stock replacement for such a reason, noting that prices for options have declined and the sector carried a great deal of risk.

"This is still a good strategy," said Nations. "The risk of the Obama Plan is also an opportunity for buying the great pharma names and buying in the money calls for stock replacement, particularly with implied volatility relatively low, is a great strategy. Buyers will participate in the vast majority of any upside yet risk only the premium paid for the calls."

Now that's an easy pill to swallow.

Questions, comments send them to us at: optionsaction@cnbc.com

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