Pfizer Backspread Part 2

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Update - 6th January 2005

Our Backspread started out just as we had hoped, trading down to $23.21 before the New Year. However, some recent technological developments have breathed more life into Pfizer.

According to the Wall Street Journal, the pharmaceutical company is about to begin attaching RFID tags to its shipments of Viagra in an effort to fight counterfeits.

RFID tags are tiny microchips that enable shipments to be tracked via radio frequency technology. Pfizer is reported to be the first company to adopt this technology on such a large scale.

Pfizer's share price has staged a bit of a rally and has finished the week trading just above our upper break even point of $24.70 to close at $24.85.

And this is the great thing about Backspreads as an option strategy - initially, we wanted the market to make a massive downward move, however, even as the market moves in the opposite direction we are still looking like realizing a profit.

Our profits on the upside aren't as large as they would have been if Pfizer had sold off, but now we have protection as the market rallies. Now, with the underlying market trading at $24.85 our option strategy looks like this:

Long 2 $22.50 Puts @ $0.15 - Now trading at 0.05 (-0.20)
Short 1 $25.00 Put @ $1.00 - Now trading at 0.40 (+0.60)

Net Profit of $40 per spread. (22% ROI).

So even though Pfizer has turned around in the opposite direction that we initially wanted, we are now up 22% on our max loss. Let's see how Pfizer goes this week. Next>>