Update – Johnson & Johnson (JNJ) Call Spread

by CC February 25, 2019 3:10 pm • FREE ACCESS• Trade Updates

About 5 weeks ago, Dan wrote his thoughts on Johnson & Johnson (JNJ) following their negative headlines (about asbestos in their baby powder!) and detailed an inexpensive bullish trade looking for a move back towards 140 in the stock. Here’s the trade and some thoughts from the time, Jan 18th:

JNJ ($130) Buy March 135 – 140 call spread for $1

-Buy to open 1 March 135 call for $1.50

-Sell to open 1 March 140 call at 50 cents

Break-even on March expiration:

Profits of up to 4 between 136 and 140 with max gain of 4 at 140 or higher

Losses of up to 1 between 135 and 136 with max loss of 1 below 135

Rationale: this trade risks less than 1% of the stock price to make a bullish bet for the next two months that the stock can re-bound back to $140. This is not a high probability bet as the options market is suggesting about a 30% chance the stock is 135 on March expiration. But we are in a whippy market, and if there was any clarity on the asbestos situation, and the company were to post good earnings and guidance next week, the stock would quickly be on its way back to $135 and possibly $140 in the weeks to come.

At the time the stock was $130, and now it has filled in more than half of that decline. With the stock now $136.70 the March 135/140 call spread is now worth 2.50, a nice gain from the initial cost of $1.

The trade itself still has extrinsic premium on it with March expiration still a few weeks away. What that means is if the stock failed to go higher, it would lose value. With the stock 136.70 the intrinsic value of the spread is 1.70. That means it needs to be above 137.50 on March expiration in order for the current profits to remain. Therefore from a trade management standpoint it’s a good time to re-assess how bullish from here you are. Obviously it could be a big win if the stock was above 140, but it could be that a nice winner turns less nice if the stock stays here or goes lower. There aren’t a ton of great rolls here that don’t seem extra bullish either, (for instance rolling the long call up to the 137s, or turning it into a calendar and closing the 135s and buying April 140s.

Therefore it probably makes sense to close for those happy with the profits, or keep a tight leash on it for those wanting to let it ride a bit. Any movement lower or a stalling of this rally this week and and profits could get less nice.