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Wednesday, November 22, 2017

Recent Sell: Pfizer

On 8 November, the December $34 covered call options I sold against my Pfizer (PFE) shares got exercised early.

While my brokerage gave me the opportunity to retain my shares and to cover the exercised options by buying substitute shares, I decided instead to let my shares go. In doing so, I will forego the PFE's December dividend. Selling my shares removed $384 from DivGro's projected annual dividend income (PADI), which now stands at $16,373.

This article presents a summary of my PFE trades and a final profit/loss analysis. Moreover, I explain my reasons for closing the PFE position.

One of the drawbacks of American-style options is that they can be exercised before the expiration date and not only on the expiration date, like European-style options. The additional flexibility makes American options more valuable to option holders relative to European options, which can only be exercised at maturity.

On 18 July, I rolled forward two covered calls on PFE to December, simultaneously reducing the strike price to $34:

#0582017-02-24:  1×PFE 15 Sep 2017 $35.00 C $    113.00 ( $ -12.09 )→ #101

#0622017-03-17:  2×PFE 15 Sep 2017 $35.00 C $    220.00 ( $ -22.57 )→ #101
#1012017-07-18:  3×PFE 15 Dec 2017 $34.00 C $   210.00 ( $   -2.39 )  

Reducing the strike price allowed me to earn extra premium income. On the other hand, I increased the likelihood that my shares would be called away! At the time, PFE was trading at $33.43 per share, just 56¢ below the $34 strike price.

My reason for moving to the December expiration was two-fold. First, the December expiration would move my latest (and largest) lot into long-term capital gains territory. Second, I was hoping to capture the December dividend on my 300 shares.

As it turns out, the options holder exercised the options just before the ex-dividend date (9 November), meaning I won't be collecting the December dividend after all. Fortunately, the exercise happened well after the one-year anniversary of my latest buy, so tax-wise I'm fine—my capital gains will be long-term gains.

Trade Summary

2012-03-02Bought: 70 shares of PFE at $21.43 per share:$1,499.91
2012-06-05 Dividend on 70 shares at 22¢ per share: $15.40
2012-09-05 Dividend on 70 shares at 22¢ per share: $15.40
2012-12-04 Dividend on 70 shares at 22¢ per share: $15.40
2013-03-05 Dividend on 70 shares at 24¢ per share: $16.80
2013-06-04 Dividend on 70 shares at 24¢ per share: $16.80
2013-09-04 Dividend on 70 shares at 24¢ per share: $16.80
2013-12-03 Dividend on 70 shares at 24¢ per share: $16.80
2014-03-04 Dividend on 70 shares at 26¢ per share: $18.20
2014-06-03 Dividend on 70 shares at 26¢ per share: $18.20
2014-09-03 Dividend on 70 shares at 26¢ per share: $18.20
2014-12-02 Dividend on 70 shares at 26¢ per share: $18.20
2015-03-03 Dividend on 70 shares at 28¢ per share: $19.60
2015-06-02 Dividend on 70 shares at 28¢ per share: $19.60
2015-09-02 Dividend on 70 shares at 28¢ per share: $19.60
2015-11-16Bought: 30 shares of PFE at $33.58 per share: $1,007.50
2015-12-01 Dividend on 70 shares at 28¢ per share: $19.60
2016-03-02 Dividend on 100 shares at 30¢ per share: $30.00
2016-06-01 Dividend on 100 shares at 30¢ per share: $30.00
2016-09-01 Dividend on 100 shares at 30¢ per share: $30.00
2016-10-28Bought: 200 shares of PFE at $34.00 per share: $6,800.00
2016-12-01 Dividend on 300 shares at 30¢ per share: $90.00
2017-03-01 Dividend on 300 shares at 32¢ per share: $96.00
2017-06-01 Dividend on 300 shares at 32¢ per share: $96.00
2017-09-01 Dividend on 300 shares at 32¢ per share: $96.00
2017-11-08Sold 300 shares of PFE at $34.00 per share:$10,200.00
Capital Gain: $892.59

Dividends Received:$732.60


Net Gain:

I made a net gain of 17.5% on the original amount invested, which is a gain of 9.27% annualized.

Closing my PFE position reduced DivGro's PADI by $384.

Options Trades

I should also summarize my PFE-related options trades, which are not included in the trade summary above. The following table presents these trades in order of execution:

#0132016-09-26:  2×PFE 28 Oct 2016 $34.00 P $    128.00 ( $    –25.40 )$    102.60 $  102.60 
#0152016-09-26:  1×PFE 17 Mar 2017 $35.00 C $      82.00 ( $    –18.69 ) $      63.31 $  165.91 
#0312016-11-25:  2×PFE 17 Mar 2017 $33.00 C $    132.00 ( $  –303.69 )→ #062$  –171.69 $    –5.88 
#0582017-02-24:  1×PFE 15 Sep 2017 $35.00 C $    113.00 ( $    –12.09 )→ #101$    100.91 $    95.03 
#0622017-03-17:  2×PFE 15 Sep 2017 $35.00 C $    220.00 ( $    –22.57 )→ #101$    197.43 $  292.46 
#1012017-07-18:  3×PFE 15 Dec 2017 $34.00 C $    210.00 ( $      –2.39 )$    207.61 $  500.07 

 key:  expired  •  closed  •  rolled  •  assigned  •  open 

So I netted $500.07 from my options trades.

Overall, my PFE-related trades netted $2,125.26 or 22.8% on the original amount invested.

Some Nerdery

When selling covered calls, you have to accept the risk that the call options might be exercised on or before the expiration date. The assignment creates a taxable event and you forfeit future dividend income. That's one reason why some investors don't like selling covered calls on dividend growth stocks.

Of course, you can always buy back the same number of shares and reinstate the dividend income. In all likelihood, though, you'd be buying back the shares at a higher price.

So, was my options trading on PFE actually successful?

On the front-end (26 September 2016), I bought 200 PFE shares due to an options assignment. I paid $34 per share when I could have paid anywhere from $31.88 to $32.56 per share. Let's take the closing price of $31.93, then I overpaid by 200 × $2.07 = $414.

On the back-end (9 November 2017), I sold 300 PFE shares due to an options assignment. I received $34 per share when I could have received anywhere from $34.85 to $35.25 per share. Taking the closing price of $35.20 means I left 300 × $1.20 = $360 "on the table". 

If I sold my shares one day later (ex-dividend) at the closing price of $35.18, I would have earned 300 × $1.18 = $354 more, plus the dividend income of $96 in December. 

Summing these (somewhat theoretical) amounts, I get $414 + $354 + $96 = $864.

Mmm ... not so successful after all!

Before jumping to the wrong conclusions, it is important to see my options trading activity in proper context. Visiting my Options page, readers will note that I've collected $19,866 from options trading since June 2016. I've invested this amount in dividend growth stocks yielding nearly 4% on cost. Reinvesting these dividends will grow DivGro's PADI faster, and I'm convinced that the benefits of options trading on dividend growth stocks outweigh the drawbacks.

Reasons For Selling

PFE consistently ranked below #40 in my monthly pulse articles and received either 3 or 4 stars in my 7-star rating. I consider stocks with a 5-star rating or better worthy of my investment dollars, provided I can buy shares at a discount to fair value. 

In August's pulse article, for example, PFE was ranked #42 out of 50 DivGro stocks and earned a 3-star rating. In August, PFE traded at a discount of about 10% to my fair value estimate, but the stock price increased from about $33 to a high of $36.78 before easing back to $35.54.

Still, PFE is trading below fair value, which I estimate is about $38.44. In comparison, Morningstar has a fair value of $38, S&P Capital IQ calculates PFE's fair value at $30.33, and finbox.io fair value estimate is $38.54. 

Given PFE's upside potential, I probably would not have closed my position if the covered call options had not been exercised. However, I'm looking to build DivGro's cash reserves and PFE's relative weak ranking and low star rating gives me sufficient reasons to part ways. 

Thanks for reading! 


  1. FerdiS
    I have 2 questions for you.
    1. Why did you drop the strike price from 35 to 34? The extra option premium didn't come close to the loss of capital gain ($300).
    2. Did you consider rolling out the call option to a later date when it approached the x-div date and it was in the money? I always keep track of the x-div date for each of my options.


    1. Good questions, jparr8350!
      1. "loss of capital gain" is theoretical until exercised, right? At the time, volatility was low and the options premium was just not available -- I'll look at this more carefully in future.
      2. I admit I did not carefully look at the ex-dividend date for PFE. In the case of PFE, I'm OK with the fact that the options got exercised, allowing me to build cash reserves as I mentioned. But I'll track ex-dividend dates for in the money options more carefully in future.


  2. As you stated, selling covered calls can mean the option is exercised and you lose your shares, of course, that isn't always a bad thing. While no options for me I'm still holding on to my PFE the old fashioned way. Thanks for sharing.

    1. That's the risk I take to earn options premium in addition to dividend income. All the best with your PFE holding. The yield is good and there's some upside left, I believe.

  3. Appreciate the detail you put into your posts, FerdiS. You explained your decision-making process well. Too bad you didn't get to collect PFE's dividend for Dec., but given your ranking for PFE within your portfolio, I can see why you made the decision you did, especially if you are looking to raise some cash.

    1. Hey, thanks Engineering Dividends! Yes, it is unfortunate that I forfeited the $96 payment... However, that's the risk that I take with selling options on stocks I own. American-style options can be exercised anytime. I can try to be more diligent about monitoring my options near ex-dividend dates, as jparr8350 suggested above. But that still wouldn't guarantee that I'll retain my shares, especially if the options move in the money.

  4. That's a bummer that your plan didn't go as hoped and you missed out on the dividend. But as you have said, that's part of the risk you take with your strategy. I'm sure you will put your capital to great use and find another dividend stock to add. Thanks for the detailed write-up about the situation!


    1. Hi Bert -- thanks for reading and commenting. While I missed out on December's dividend, I made more than 5 times that dividend by trading options. In fact, I netted options income equivalent to 1.3 times PFE's annual dividend. So I'm happy to take on the risk of trading options!

      I realize options trading is not for everyone, but it's working for me!

  5. I've rarely had my calls executed early, but I try to start making moves once it's close to ITM. That's when I'll start trying to roll it out in time especially if there's an ex-div date coming up. I had my own PFE shares called away from me earlier this month too after the big move up after earnings, but it's not the end of the world. I'm hoping to get a chance to write some puts against PFE to rebuild my position, but the premium isn't that rich which means you have to get pretty aggressive with the strike price. All the best.

    1. Hi, Passive IncomePursuit -- good to hear from you! I usually monitor things a little more carefully when my options move in the money. However, I have to admit that I did not pay attention to PFE's ex-dividend date, with the consequences as explained in the article. On the other hand, I've not too thrilled with my PFE ownership and I'm fine with it that my shares got called away at a nice enough gain. I'll be moving along to other dividend-paying stocks rather than trying to invest in PFE again. Happy investing!

  6. Although it's true that American style options can be assigned at any time the vast majority of early assignments are against ITM (or ATM) covered calls and are the result of dividend arbitrage around the ex-div date.

    I'm with you as to being pretty lukewarm towards PFE. You probably could have played that a little more "optimally" (i.e. roll the position out to collect the dividend, and maybe gotten a slightly higher strike), but if it's not a position you're thrilled about, assignment for a tidy profit is never a terrible result.

    I would consider this a highly successful trade. Nice work.

    1. Yes, of course you're right that American style options are mostly assigned when ITM or ATM and around the ex-div date. Sometimes I wonder about the "other side" of the trade. I'm guessing my few options/shares must be part of a much larger exercise, otherwise I cannot see how a "dividend grab" would be worth doing.

      My lesson learned here is to more carefully monitor ITM or ATM options covered calls near the ex-dividend date. That way, I too can trade a little more "optimally" :-)

      Take care and happy investing!


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