Trading requires patience—loads of it. My favorite visual for market timing is a leopard crouching in the grass. Slowly, he stalks his prey. Closer, he creeps. Evolution has trained him to exercise utmost caution. Jump too soon, and the gazelle bounds away to safety, never to be caught.
But this leopard isn’t going hungry, no. He’s smart. Eventually, once he’s crept close enough…
BAM!
He leaps, claws out, teeth bared, and well, dinner is served. Poor little Bambi never had a chance.
I’ve been stalking the Pfizer pullback for over a week. Today we’re going to use it as an example of how I stalk a setup.
My favorite bull retracements are those preceded by an upswing with increasing momentum. Pfizer is normally too boring to catch my eye, but November’s surge got me interested. I believe that dips following momentum-laced rallies are the best ones to buy.
Thus, on December 11th, I started watching Pfizer for an opportunity. It was the third down day in a row. Then, on the 14th, a dramatic down bar formed. It was still above the 20-day moving average, so I wasn’t deterred. The next bar (15th) had me ready to pounce. We ended with a smaller-bodied candle suggesting downside momentum was waning. But, I wanted to see buyers return to push prices above a prior day’s high.
I put an alert above $39.18.
But the stock fell again on the 16th. I kept creeping closer. Finally, after six consecutive down days, I got my signal today. We ended with a bullish hammer candle. It formed right at an old resistance zone that looks to be turning into support.
The higher dividend yield of 4.10% makes me a willing buyer of the stock at lower prices. Plus, I like the higher probability inherent in a naked put play. Not to mention the implied volatility rank of 32% is one of the highest on my watchlist right now.
So I sold the Jan $36 strike put for around 65 cents.
Target
Ideally, Pfizer will snap back, the put will fall in value, and I’ll snatch it back around 15 cents to capture a $50 profit per contract.
Sure, I could ride to expiration, but I’m an advocate of taking profits early to improve your return on time invested.
Stop Loss
As a willing buyer of the stock, I don’t really have a stop loss. Instead, if prices fall, I’ll allow assignment buying shares at a cost basis of $35.35. Then, I can either settle in and collect dividends until the price recovers back well into profitable territory or commence with selling covered calls to reduce the basis further.
And if the stock really gets punched in the face, I can sell puts in the low $30s to lower my average cost.
Come what may, I have a plan that should generate profits in all but the most bearish situations. Even then, my patience with the position and longer time horizon should eventually allow the play to bear fruit.
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