Trade Update $JNJ: Rolling Up Put Strikes, “This Aggression Will Not Stand”

by Dan April 26, 2013 10:47 am • Commentary

Update April 26th, 2013 at 10:40am:  Since initiating a bearish short dated trade on JNJ on April 12th (below), the stock has risen ~3% vs the SPX which is down about 30 bps.  Let the defensive out-performance continue, until it doesn’t.   In the last week we have seen similar low growth, defensive names like PG, BMY, AMGN & PFE all come crashing down from 52 week, or all time highs on the slightest bit of bad news.  My sense is that as the multiples get very stretched and the realization of lower than expected global growth and continued currency headwinds sink into the investment equation for staples and healthcare stocks, investors may quickly head for the doors at the first sign of broad market weakness.

I wan to take this opportunity to roll up my strikes in this trade, which will give me far better odds of success in the event of a sell off in the stock no matter what the reason in the weeks to come.

Trade Adjustment:  JNJ ($85) Bought May 85/82.5 Put Spread for .75
  • Bought 1 JNJ May 85 Put to OPEN for 1.08
  • Sold 1 JNJ May 82.5 Put to Close at .33
New Position: Long JNJ ($85) May 85 Put for 2.10

Break-Even on May Expiration:

  • Profit below 82.90
  • Losses of up to 2.10 btwn 82.90 and 85, with max loss of 2.10 above 85

Trade Rationale:  Obviously I was a bit early, but the price action by some of JNJ’s peers that share similar characteristics leave me to believe that we are close to an unwind of these very crowded trades.




Original Post APril 12th, 2013:  New Trade $JNJ: Don’t Get Caught Holding Your Johnson & Johnson

Earlier today Enis wrote a fairly splendid Chart of the Day post (below), showing how giddy the equity investment world has gotten about defensive stocks.  We haven’t traded any of these names in quite a while, but the moves are getting ridiculously stretched in our opinion, not to mention their valuations.  I know, I know, why step in front of a freight train, why break with what has working, well people its simple, gravity.

After starting the week with a ratings downgrade from JPM, the stock along with entire healthcare group, and consumer staples have rushed back to all time highs. The JPM’s downgrade from Buy to Hold because was largely predicated on the stock’s valuation, which after the recent run-up is now at 16% premium to large cap pharma companies, and a 12% premium to medical device makers.  JPM analyst also expects a downward revision to 2013 guidance on the company’s Apr 16th report.

JNJ’s weekly chart shows that the stock is up in a straight line since the start of the year after it broke the 72.5 resistance level.

JNJ 5 year weekly, Courtesy of Bloomberg
JNJ 5 year weekly, Courtesy of Bloomberg


Given the slope of this ascent, and earnings next week, options are too cheap from both a vol standpoint and a dollar standpoint.  As a trader I want to look for directional opportunities where I think I am not paying much for an event, while giving me time to earn out a prospective move in the underlying stock.

TRADE: JNJ ($82.54) Bought the May 82.5 Put for 1.35

-Bought 1 May 82.5 Put for 1.35

Break evens on May Expiration:

-Losses of up to 1.35 btwn 81.15 and 82.50, max loss of 1.35 above 82.50 (~1.6% of the underlying)

-Profits below 81.15 or about 1.6% lower.

Trade Rationale:   Given the recent assent in defensive sectors like staples and health care at all time highs in the market heading into a potential volatile earnings period, I want to own options in names that I think have the potential to move on their own fundamental news of could be susceptible to a broad market sell-off, which I believe is near.

If you are gonna try to pick a top you might as well do it where the options market is not fleecing you and you do so with defined risk.




Original Post April 12th, 2012 by Enis Taner: Chart of the Day – Extended Defensives, $XLV, $XLP, $XLU

It’s the 3 generals of this market – Health care, Staples, and Utilities.  The glamorous, exciting sectors of the new economy.  They are bid up day after day, and are leading the broader indices higher as well.  Even on a down day for the broader market like today, all 3 sector ETFs are trading around unchanged.

The slope of their ascent has changed dramatically, though, in 2013.  It is getting to the point where the word “unsustainable” comes to mind.  Here is the XLV weekly over the past 3 years:

3 year weekly chart of XLV, Courtesy of Bloomberg
3 year weekly chart of XLV, Courtesy of Bloomberg

Health care is by far the most extended ETF among the defensives, which is not surprising since it’s the best performing sector in the U.S. this year.  But the slope of that ascent is getting unhealthy, especially when we consider that the ETF has not really had a down week in 2013 (a 2 cent selloff in February notwithstanding).

Staples is a very similar chart overall, though it has not been quite as strong as health care:

XLP 3 year weekly chart, Courtesy of Bloomberg
XLP 3 year weekly chart, Courtesy of Bloomberg

Utilities was weaker than both health care and staples in prior years, but the 2013 ascent is almost identical:

3 year weekly chart of XLU, Courtesy of Bloomberg
3 year weekly chart of XLU, Courtesy of Bloomberg

XLU has gained almost the same in percentage terms in 2013 as it did in that 2.5 year period.

Putting the charts aside, I do actually think health care is one of the best sectors to own in this market from a fundamental valuation standpoint.  But these moves are becoming unhealthy, so any reasonable pullback would signal weakness for the broader market as well.  Look for these leaders to turn for any pullback to last more than a couple days.