If one purchased

Pfizer

(PFE) - Get Report

two years ago with an expectation of a nice capital gain from the stock, the trader would have been sorely disappointed because the stock has done nothing. However, one would have cash in their pocket from a consistent dividend. More aggressive traders using a covered call strategy, would have had an even better return as the overall volatility on PFE has remained low. This is exactly why some investors and traders look for a company like this big pharmaceutical. No, PFE will not likely pop 40% in a year, but the company can return 5% from a dividend and premium selling can produce even more income.

Change is in the air, however. In October, PFE offered to acquire King Pharmaceuticals (KG) for $3.6 billion, or $14.25 per share, in an effort to obtain the pain drugs portfolio. In addition to improving its pipeline, the company also underwent massive management changes. PFE's CEO resigned on December 5 and his replacement elevated the heads of several business units to the executive leadership team. Any one of these might raise the volatility of the underlying stock. Currently, PFE has just bounced off of its lowest volatility in about two years, meanwhile the stock itself is sitting near six-month highs.

This has lead to some very interesting paper flow. A trader bought at least 100,000 of the April 19 calls for a net price of about $0.25 outright. Even for a company like PFE, that is a massive call buy. The trader would be able to buy up to 10,000,000 shares of PFE above $19.00, if the stock breaks that barrier. This customer has some sort of axe to grind here.

One thing I consistently talk about on my blog Option Pit, is that options trades are not always what they seem. For instance, at first blush, most traders would assume that this is an outright bullish play on the PFE options. I think that it probably is just that, because as we all know, when implied volatility is low and one is bullish, call buying can be a very smart play.

There is another possibility though. As I stated earlier, this stock is sitting at six-month highs and the SPX is also sitting at one-year highs. What if this trader is shorting the stock and buying the 19s for $0.25 as an insurance policy against a large short position? This could make sense as the trader would be selling six-month highs in PFE and hedging the short sale with low implied volatility calls.

The only thing I know for certain is that this is a major bet on volatility...something that the customer might not realize. Like it or not, the real bet is an increase in movement either up or down. I think it is probably a smart bet. The implied volatility is low, and with the stock near its highs, it could turn around fast or take a dive. I am going to follow this trader on volatility, but change the approach. Instead of a straight call buy, I am going to purchase a strangle. I would buy the April 15 puts for $0.20 and buy the April 19 calls for $0.30. My hope would be for an increase in implied volatility over the next six to eight weeks or a major breakout in the stock.

Trades: With PFE trading at $17.65, buy to open PFE April 19 calls for $0.30 and buy to open PFE April 15 puts for $0.20.

The net buy is a PFE April 15/20 strangle for $0.50.

At the time of publication, Mark Sebastian held no positions in the stocks or issues mentioned.

Mark Sebastian is COO and Director of Education for Option Pit Option Mentoring. Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the Director of Risk for a private hedge fund. He started the popular blog Option911, which is now the Option Pit blog. Sebastian has been published nationally on Yahoo! Finance, is a featured contributor for TheStreet's OptionsProfits, SFO, OptionsZone and is the managing editor for Expiring Monthly: The Option Traders Journal. Mark has a Bachelor's in Science from Villanova University.

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