Options Action

Pfizer's Options Market Terra Firma


Last week we highlighted the troubles over at CBS and how option prices were suggesting a dividend cut in the coming quarters for the Tiffany network.

On February 18th, amid a huge advertising slowdown, CBS slashed its dividend, a move highlighted by both Stacey Gilbert and Mike Khouw of "Options Action" fame. Their brilliance underscored an important point: you don't need to trade options to appreciate their value. Options can be a fabulous tool for not only hedging your portfolio, but also predicting future events, such as precipitous stock declines, or even dividend cuts.

And with that, let's turn our attention to another well known name with a juicy dividend: Pfizer .

The company already announced it would cut its dividend in connection with its planned purchase of rival Wyeth . That news, plus the general market sell-off, has sent shares of Pfizer tumbling, losing nearly a quarter of its value since the announced deal. But according to Gilbert, options traders appear to have priced in some sort of floor here for the Pharma giant.

"You have to love a market where the bullish flow can be categorized by trading suggestive of a floor," says Gilbert. "While investors may not be positioning for a notable upside move in PFE in the near-term, at least they are positioning for limited downside over the next month as suggested by the sellers of March calls and puts."

By selling the March straddle, options traders are more or less betting that Pfizer stock will stay between $14 and $11 bucks before March expiration. Call it options market terra firma.

Nothing to write home about, but certainly not a dose of bad medicine in a market that is already killing investors.