Dear Momentum Options Subscriber,

This morning, I covered the breakout in Pfizer’s (PFE, $31.75, down $0.22) chart and what it could mean for our option trades with February and March expirations. Now that I have reviewed the chart work, let’s take a look at the fundamentals.

The company recently announced third-quarter earnings of $0.57 a share on revenue of $12.36 billion. Wall Street was expecting $0.55 a share on revenue of $12.22 billion. Shares were at $29 going into the announcement and gained $0.06 for the session despite the $0.02 beat.

The good news was somewhat subdued, as Pfizer narrowed it 2014 final results on the release. The company lowered full-year guidance to $2.23-$2.27 from $2.20-$2.30. The suit-and-ties had forecast a profit of $2.24 for the year, on average. The narrowed guidance didn’t change, as the company’s “average” is still at $2.25.

The company has beaten Wall Street estimates over the last four quarters by $0.02, $0.01, $0.02 and $0.04, respectively. This shows that they have a feel for tempering Wall Street’s expectations.

Perhaps the savvy traders that do their homework see the same things I am seeing, which could be why shares are finally starting to rally.

Pfizer still has to deal with the negative impact from product losses, generic competition and the exclusivity and termination with some of its partnerships (according to its CEO), but there is more reward than risk with this stock.

The company is completing a massive buyback of $5 billion of its own stock this year. As of late October, Pfizer had repurchased $4.2 billion shares, and the company said in its conference call that it still expects to reach that goal by year-end.

As far as drugs, the recent approval of Trumenba was good news in the fight against meningococcal disease. The drug is manufactured by Wyeth Pharmaceuticals, a subsidiary of Pfizer.

A decent deal with Germany’s Merck (MKGAY) could offer hope for a new cancer treatment of some kind down the road. The $850 million investment likely ruined any rumored takeover bid from Pfizer for Europe’s AstraZeneca (AZN). The new takeover chatter has Mylan (MYL) as a possible candidate.

Shares of Mylan are currently trading above $56. A premium of 20%-25% on an acquisition would have Pfizer paying between $67-$70 a share for Mylan. The January call options for Mylan are carrying hefty premiums as a result of the elevated volatility.

Investing in takeover targets can be a risk endeavor, which is why I would shy away from Mylan’s call options. Instead, I focused on Pfizer’s call options, as there is a chance for a 100% return by February or March.

The Pfizer February 33 calls are currently trading near $0.50. If shares can reach $34 by mid-February, the calls would be worth at least $1.00 for a 100% return from current levels. These options currently have 72 days before they expire, which allows plenty of time for the trade to play out.

The PFE March 33 calls are going for roughly $0.65 and would be worth $1.00 if shares reach $34. At current levels, this would equate to a return over 50% if Pfizer shares rise 7% by mid-March. Even better, if shares of Pfizer run to $35, or 10% from current levels, these options would be $2 in the money for a return of 208%. The March call options expire in 100 days and provide an additional month for the trade to play out.

The risk to both of these trades emerges if shares stay below $33 and trend lower over the next two to three months. Given the recent breakout and the solid fundamentals, I like the risk/reward of both options. If shares fall below $30.50, the trades could be closed to cut losses and save some premium.

As far as the market, I said to buckle your seat belts this morning. The bears have made a run at the second layers of support like I expected, but the bigger question will be if they hold into the close. The Watch List is building with some great potential trades if so, and I also have some bearish trades in case support fails.

Heading into the second half of trading, the Dow is down 164 to 17,688, while the S&P 500 is lower by 15 to 2,045. The Nasdaq is getting whacked for 18 points to 4,722. The bright spot has been the Russell 2000, which is up a fraction of a point to 1,167.

Momentum Options Play List

Closed Momentum Options Trades for 2014: 96-59 (62%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.

Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.

All prices given in this update are current as of 12:55 p.m. EST.

Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the Open Trades and Closed Trades.


Pfizer (PFE, $31.75, down $0.22)

PFE February 33 calls (PFE150220C00033000, $0.55, down $0.06)

Entry Price: $0.57 (12/8/2014)

Exit Target: $1.15

Return: -4%

Stop Target: None


PFE March 33 calls (PFE150320C00033000, $0.65, down $0.06)

Entry Price: $0.68 (12/8/2014)

Exit Target: $1.40

Return: -4%

Stop Target: None

Action: I would like to see $31.75 hold into the close.

You can view the chart work on PFE in the Dec. 9 Pre-Market Update.


iShares Russell 2000 (IWM, $116.79, up $0.57)

IWM January 121 calls (IWM150117C00121000, $0.77, up $0.15)

Entry Price: $0.90 (12/5/2014)

Exit Target: $1.80

Return: -14%

Stop Target: None

Action: How ’bout them small-caps! Any positive close today would be bullish.

Near-term support is at $115. Resistance is at $118. If cleared, a run past $120 could be in the works. The 52-week high is $120.97.


PowerShares QQQ (QQQ, $104.38, down $0.25)

QQQ January 107 calls (QQQ150117C00107000, $0.70, down $0.03)

Entry Price: $0.98 (12/5/2014)

Exit Target: $2.00

Return: -29%

Stop Target: None

Action:  Support is at $105, with $103 serving as backup. I have talked about the QQQs making a run to $110, and the recent 52-week high is north of $106.


American Express (AXP, $92.94, down $0.63)

AXP January 95 calls (AXP150117C00095000, $1.40, up $0.30)

Entry Price: $0.75 (12/3/2014)

Exit Target: $1.50 (closed half at $1.40 on 12/8/2014)

Return: 60%

Stop Target: $1.00 (Stop Limit)

Action: The Stop Limit of $1.00 triggered on today’s dip in the stock to $92, as the calls traded down to $0.88. I will likely be back in an AXP trade, perhaps as early as this week.


JDS Uniphase (JDSU, $13.53, up $0.29)

JDSU January 13 calls (JDSU150117C00013000, $0.90, up $0.15)

Entry Price: $0.65 (12/3/2014)

Exit Target: $1.30

Return: 38%

Stop Target: None


JDSU March 14 calls (JDSU150320C00014000, $0.90, up $0.15)

Entry Price: $0.70 (12/3/2014)

Exit Target: $1.40

Return: 29%

Stop Target: None

Action: Resistance is at $13.50-$13.75. If cleared, a run to $14-$15 should be in the works. Support is at $13 and the 50-day moving average. There is additional risk to $12.50 and the 100/200-day moving averages on a close below $12.75.

You can read my full update on JDSU in the Dec. 3 Alert.


Diamond Foods (DMND, $28.85, down $0.16)

DMND December 32 calls (DMND141220C00032000, $0.10, down $0.30)

Entry Price: $0.87 (11/18/2014)

Exit Target: $1.00 (Limit Order on Half)

Return: -89%

Stop Target: None

Action: Close the trade at current levels to save the remaining premium. The Limit Order of $1.00 never had a chance, as shares could only push a high of $30 on the open.


IMAX (IMAX, $29.71, down $0.45)

IMAX December 32 calls (IMAX1220C00032000, $0.10, down $0.05)

Entry Price: $0.35 (11/12/2014)

Exit Target: $0.70 (Limit Order on Half)

Return: -71%

Stop Target: None

Action: Close the trade at current levels. Today’s drop below $30 has been discouraging, and it’s time to cut the cord on this trade. Shares will need to move 10% by next Friday, and that is unlikely to happen.


International Business Machines (IBM, $161.19, down $0.67)

IBM January 170 calls (IBM150117C00170000, $0.55, down $0.05)

Entry Price: $1.75 (11/10/2014)

Exit Target: $3.50

Return: -69%

Stop Target: $0.50

Action: Support is at $160 following the drop below $162.50, which will now serve as short-term resistance.


Flextronics (FLEX, $10.80, down $0.18)

FLEX January 11 calls (FLEX150117C00011000, $0.30, down $0.10)

Entry Price: $0.68 (9/5/2014)

Exit Target: $1.25

Return: -55%

Stop Target: None

Action: Support is at $10.75, and a close below this level might force me out of the trade. Shares were back above $11 in after-hours, but new resistance is back in play at $11.25.


Trades on Hold — other 2014 Portfolio Open positions (1): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when the trade closes or if the options expire. Click on the Open Trades and Closed Trades pages to see all open and closed positions.

Fortinet December 29 calls (from September 2014) — Continue to hold.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options