1:35pm (EST)

Over the years, we have covered quite a few explosive biotech stocks that have made incredible returns for our subscribers but sometimes we can overlook the 800-pound gorillas in the room.

We have been following shares of Pfizer (PFE, $23.84, down $0.42) for years but we rarely, if ever, play options on the stock as a directional call or put play.  Shares don’t quite move as much as they did in the late 90’s which saw the stock split 4 times and growth was abundant.  Nowadays, there is risk associated in owning the stock as some of Pfizer’s drugs come off patient and face competition risks.

There are also risks with developing new drugs as research and development, clinical trials, and marketing can get expensive.  However, getting a multi-billion dollar blockbuster drug approved and to market can be lucrative for years to come.

Pfizer had high hopes for its Alzheimer’s drug, Bapineuzumab, which it was in development with Johnson & Johnson (JNJ, $68.37, down $0.48) and Elan (ELN, $10.87, down $0.38) but halted plans to develop the drug after another trial failure.

Bapineuzumab was in the second stage of a final 4-stage trial but failed to improve the symptoms of dementia.  In late July, the drug also failed a late-stage trial.

Alzheimer’s is a hard disease to crack and there hasn’t been much advancement in finding a cure.  Pfizer decided to pull the plug and go back to the drawing board but they will be looking to partner with another biotech company that may have a new cure for Alzheimer’s in their pipeline.

Shares of Pfizer looked like a steal under $20 but we waffled on the chance to buy it in the high teens and add it to our Weekly Wrap covered call portfolio.  We mentioned a few years ago Pfizer should’ve have taken a hard look at Vivus (VVUS, $23.24, up $2.02) or Arena Pharmaceuticals (ARNA, $7.41, up $0.20) as a possible play in the obesity market but they ignored us.

We have done well with Vivus and Arena this year by playing both the stock and options.  Vivus has returned our subscribers numerous double-digit gains over the past couple of years.  In 2011, we recommended covered calls 3 times that made our subscribers 18%, 17% and 14% as shares traded below $10 for much of the year.  In January, we went back to the well and suggested another Vivus covered call trade that made our subscribers 38% by March.

We also started recommending Arena back in February when shares were just above $2.  We used the juicy premiums in the calls options to lower our risk to $1.88 and in July our Weekly Wrap subscribers closed a trade for a 117% return.  In March, we made 12% on a quick Arena call option trade but rolled the position over in late April and early May to get repositioned. Those 2 call options trades made our subscribers 464% and 54%, respectively.

Although we don’t own Pfizer, we did reload on Vivus again in July and we are hoping to make a double-digit profit by next Friday with the trade.  As far as Pfizer, we would love to see shares fall back to $20 but support is strong at $22 and we doubt shares fall 10% on this news.  They could over the next few weeks and we are watching Pfizer closely as a possible covered call trade, but for now, we are happy holding Vivus.

As far as the market, the bulls have pierced resistance and have cleared our next wave of price targets.  We will have to see how the indexes end at the close but we are still waiting to see if there will be a breakout.  In the meantime, we have a couple of trades in our Weekly Wrap that are allowing us to enjoy the upside and the new trades for our Daily have September expiration dates so we have plenty of time to wait for a pullback while the bulls continue running.

When the market is in a trading range, it is best to have both long and short positions which should offset some of the volatility we have been seeing.  Although we are itchy to trade, we are trying to remain disciplined to avoid the urge of adding call options or buying more puts until we get a few more signals on where this market is headed over the next month or two and not just today.

As we head to press, the Dow is up 97 points to 13,214 while the S&P is higher by 12 points to 1,406.  The Nasdaq is popping 35 points and is at 3,024.  Subscribers, check the Members Area for the updates.