New Trade $JNJ: Stiff Resistance for Johnson

by Dan October 11, 2013 2:52 pm • Commentary

A few weeks back I made a short term bearish bet on JNJ (below) when I thought the stock had run to far too fast in the month of Sept, and appeared to be forming a head and shoulders pattern, chart from Sept 20th (below):

JNJ ytd chart from Bloomberg


I took the trade off after making quick gains as the puts that I bought doubled in less than a week (update below).  The stock nearly touched the $85 neckline earlier this week of the possible head and shoulders formation, and has since bounced more than 4% in 2 trading days.  Flash forward to today, Goldman took their dreaded sell rating off of the stock and slapped an almost giddy neutral on it with a 12 month price target of $95.

The chart below shows today’s price action bringing the stock right back to the downtrend line that has been in place since the all time highs in August.

JNJ 1yr chart from Bloomberg
JNJ 1yr chart from Bloomberg

From where I am sitting this looks like a nice spot to set up a trade for a re-test of the $85 level in the coming weeks.  The company reports Q3 earnings on Oct 15th and the options market is implying about a 1.5% move.  The stock is not a huge mover on earnings, averaging just about a 1.25% move following the last 4 reports.

As I don’t expect the stock to move much earnings I want to sell the slightly elevated (in vol terms) options in next week’s expiration to finance the purchase of puts in November, a period where I could see the stock possibly retest this weeks lows.

TRADE:  JNJ ($89.25) Bought Oct19th / Nov16th 87.50 Put Calendar for .72

-Sold 1 Oct19th 87.50 Put at .38

-Bought 1 Nov16th 87.50 Put for 1.10

Break-Even on Oct 19th Expiration:

-Profits are maximized at $87.50. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Maximum risk is .72

Trade Rationale:  If the stock is at or near 87.50 a week from today I will look to spread the Nov puts by selling a lower strike put or possibly a shorter dated weekly and turn into a calendar again, further reducing my cost basis for the Nov puts.





Trade Update Sept 25th, 2013:    $JNJ: Closing Oct 90 Puts For More Than A Quick Double

Since initiating this position on Friday afternoon, JNJ has declined or about 2.5%, and about 3.5% from the highs on Friday morning.  I am now going to lock in the profit for a little more than a double and look for a better re-entry on a bounce.   My thesis remains in tact, but this sort of gains in such s short period of time warrants some form of action.

Action: JNJ ($87.63) Sold to Close Oct 90 puts at 2.75 for a 1.40 gain

For those who would be inclined to let the profit ride, I considered selling the Oct 87.50 put at 1.25 to open and have on the Oct 90/87.50 Put Spread on for .10….

I could easily see this stock bottoming out near $85, but will take another look.


Original Post Sept. 20th, 2013:   New Trade $JNJ: Fairweather Johnson 

SepTaper or OcTaper? It really doesn’t matter from where I am sitting. Did yields get a tad ahead of themselves touching 3% on the 10 year a couple weeks ago? Maybe, but they are going back there to be sure, and the fact that 2 days after the Fed’s head-fake the 10 yr yield is only 2.76% tells me that market participants remain positioned for a re-test and the Fed to finally move their feet in the next month or two.

Make no mistake about it, this is a fairly dicey trading environment where some of the largest players in the investment universe had already reallocated tens, if not hundreds of billions of dollars over the last few months in anticipation of higher growth, higher yield environment.  While I am by no means a macro trader, it is my sense that even if Fed does not Taper as soon as most investors expect, yields will likely stay put as it has to come at some point and that this past spring they way overshot to the downside.

From where I am sitting I am inclined to play single stocks stories and attempt to identify disconnects btwn, fundamentals, valuations, technicals and how the options market is pricing the situation.

JNJ is just the sort of name that has bugged me all year. Here is a company that by all accounts is executing well in a difficult macro environment, and the stock has been rewarded outpacing the SPX’s ytd gains by more than 8% (up 28.5% in 2013 vs SPX up 20.25%).    In the early part of the year when rates were VERY low, investors were desperate in their search for yield and piled into 3% dividend payers like JNJ.  But now with rates higher and not apparently budging to much, stocks like JNJ have come a bit out of favor.  As the SPX made a new all time high on Wednesday, JNJ remains almost 5% off of its all time highs made in Aug.

The one year chart below of JNJ is forming the potentially troubling technical pattern called a head and shoulders top, with the stock just today rejected at the 50 day moving average, with a possible re-test of the $85 neckline in the offing.  (For a more detailed look at the technical set up check out Enis Chart of the Day post from Aug 22nd here).

JNJ ytd chart from Bloomberg
JNJ ytd chart from Bloomberg

The stock’s PE, trading at almost 16x next years earnings that are expected to grow at only 7% (for the next 3 years) on sales that are only expected to grow at low single digits seems a tad expensive and approaching the highs of the last 5 years (below).  While valuation has not been a great reason to short stocks in this bull market,  investors may start to get a tad more choosy in the next leg of the rally (if there is one) and rotate into more cyclical laggards trading at discount to the market rather that at or above a market multiple.

JNJ 5 yr P/E range from Bloomberg
JNJ 5 yr P/E range from Bloomberg

The last input I wan to look at with JNJ is implied volatility (blue line below), which while elevated from early 2013 levels, it remains at 6 month lows, slightly below realized vol (white line).

JNJ Implied vol (blue) vs realized vol (white) from Bloomberg
JNJ Implied vol (blue) vs realized vol (white) from Bloomberg

I wan to look at October expiration as it will catch the company’s Q3 earnings and will also likely catch a good bit of the upcoming budget debate, or at least the part leading up to a potential Govt shutdown that could add to market volatility and keep these short dated options bid.

I want to take a near term bearish view on JNJ that a potential combination of any of the following over the next month: earnings disappointment, technical breakdown, rotation out of quasi bond proxies, or a broad market sell off could cause increased volatility (downward) in JNJ shares.

TRADE: JNJ ($90) Bought Oct 90 Puts for 1.35

Break-Even on Oct Expiration:

Profits:  Below 88.65

Losses: btwn 88.65 and 90 lose up to 1.35, above 90 lose full 1.35

Trade Rationale:  Broad market moves are going to be tough to catch in this very unpredictable market, a market that seems to be trading on almost everything other fundamentals.  Despite JNJ performing well in difficult environment the shares reflect that and given the relative cheapness of options, risking less than 1.5% over the next month, with earnings a couple day before expiration, should keep these options well bid and the trade in the game.