Making 9% Over the Next Six Months Sounds Pretty Good to Me
After a swing for the fences, I'm looking to hit a solid single with this trade by enhancing a low-P/E, high-yield name.
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My recent swing for the fences covered call trade idea on Bit Digital BTBT has gotten off to a good start. The stock has moved up more than 10% since I highlighted that high reward trade a week ago. This bodes well for reaping around a 50% return when those covered calls expire in the money in January.
Today, I am going to profile a more typical trade for my portfolio in what is a very overbought market. This one is around a type of "consistent single" that these days is the focus of my portfolio strategy. It is basically enhancing a core dividend play via a basic covered call overlay. All I want to do is make is my 9% over the next six months, even if the shares fall slightly from here.
Today's play is around a low P/E, high dividend yield name that is Big Pharma royalty in the form of Pfizer PFE. The shares are down only slightly in 2025 but have behaved better over the past three months.
The company had a huge surge of revenues from its Covid vaccines following that pandemic. While that gravy train has largely come to an end, management used that lucre to be quite active on the acquisition front and backfill its product portfolio and add assets to an already diverse pipeline in development.
The company’s three business focus areas include Preventative Care, where the company's vaccines fit in. Not surprisingly, this segment has had the biggest volatility in revenues in recent years. It also has a Specialty Care unit that targets immunology, rare diseases and other specialized areas of medicine. Oncology makes up the last of the company’s "Big Three."
Like all Big Pharma concerns, tariffs and the administration's efforts to move drug prices lower are concerns. That said, Pfizer has large margins.
Revenues and earnings are also expected to be roughly flat over the next three years for the company. However, that appears fully reflected in the stock price, with the stock trading at just over 8x earnings, about one-third the overall market multiple. Management is also pursuing a large cost-cutting and operating efficiency program that should drop billions of dollars to the bottom line in the next few years.
The stock comes with a large annual dividend yield of more than 6.5%. This should continue to put a nice floor under the stock price. What's more, I can both enhance that yield and provide some downside protection with the following covered call strategy.
Option Strategy
Here is how one can initiate a position in PFE utilizing a covered call strategy. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the January $25 call strikes, fashion a covered call order with a net debit in the $23.65 to $23.75 a share range (net stock price - option premium). Liquidity is beyond solid with the options against this equity.
This strategy provides downside protection of just over 8% for the trade’s duration, which includes two quarterly dividend payouts of $0.43 a share. This strategy also provides return potential of 9%, including dividends, even if the stock trades slightly down over its option duration.
This is not a sexy trade, but I am more than happy to take singles in this market.
At the time of publication, Jensen was long BTBT and PFE.
