The following article outlines the upcoming legal decision concerning Lipitor that I mentioned earlier.
Pfizer Is Expected to Be Active
By MOHAMMED HADI
DOW JONES NEWSWIRES
October 4, 2005
NEW YORK -- Investors expecting an upcoming legal decision to move Pfizer Inc.'s shares took positions in the drug giant's options.
Pfizer's patents on cholesterol drug Lipitor are being challenged by Indian generic drug maker Ranbaxy Laboratories Ltd. in the U.S. and abroad. With sales of Lipitor passing the $10 billion mark in 2004, the importance of the challenge is self-evident.
One of these cases was heard in the U.K. In a note to clients yesterday, UBS analysts Carl Seiden and Roopesh Patel said a ruling is expected on Oct. 11., and should move Pfizer's shares about $2 in one direction or the other.
Investors who agreed bought October 25 straddles. By buying the October 25 calls and also the October 25 puts, this crowd will benefit regardless of which direction the shares move as long as that move is more than the cost of the options.
As Pfizer's shares rose 32 cents, or 1.3%, to $25.29 in 4 p.m. New York Stock Exchange composite trading, the October 25 calls traded 24,318 contracts and rose 49 cents to $1.05 on the International Securities Exchange. The October 25 puts traded 48,850 contracts and were at 60 cents on the Chicago Board Options Exchange.
Based on ask prices, the strangle cost was $1.80. A buyer at that price will be profitable if the stock moves above $26.80 or below $23.20 by the October expiration date.
Those feeling a little bolder targeted strangles. By buying the October 27.50 calls and the October 22.50 puts, some speculated that the move in Pfizer's shares will be even greater than the $2 that Messrs. Seiden and Patel predict.
Pfizer's October 27.50 calls traded 19,894 contracts and rose 10 cents to 20 cents, while the October 22.50 puts traded 27,964 contracts and rose 15 cents to 20 cents, both on the ISE. For a combined cost of 40 cents, based on ask prices, the strangle is a relatively cheap way to bet on a sharp move.
This activity left Pfizer's implied volatility at 28%, up from 25% on Friday, according to Track Data. |
