Name That Trade – $JNJ: Stiff Resistance for Johnson

by Dan April 13, 2015 1:58 pm • Commentary

Johnson & Johnson (JNJ) reports Q1 results tomorrow before the open. The options market is implying about a 2% move. The April 17th 101 straddle (the call and the put premium) is offered at about $2.20, or about 2% of the underlying stock price.  If you bought the straddle, and thus the move, you would need the stock to rally above $103.20, or fall below $98.80 by Friday’s close to break-even.  Over the last 4 quarters the stock has averaged about 2.25% one day move, thus making tomorrow’s expect movement look ever so slightly cheap.

Looking at the 6 month chart, it is easy to see resistance at the March highs, which corresponds with the stock’s 200 day moving average (yellow line) and the recent lows down near $98 (green line), a level the stock has traded at or very near in each of the last three months:

JNJ 6 month chart from Bloomberg
JNJ 6 month chart from Bloomberg

JNJ is down about 3.5% on the year, and about 8% from the 52 week and all time highs made late last year.  The stock’s volatility has a lot to do with their more than 50% revenue exposure outside the U.S. given the strength of the dollar.

For those who are long and think the stock could remain range bound, looking to add to the stock’s 2.77% dividend yield could be attractive as you wait for the dollar to cool off.  One overlay that looked interesting is selling short dated strangles.

Hypothetical Overlay against 100 shares of JNJ around $101:

Sell the June 105/95 strangle at $2.00

-Sell 1 June 105 call at .90

-Sell 1 June 95 put at 1.10

Break-Even on June expiration:

-If the stock is between 105 and 95 on June expiration then you would receive the $2 in premium, or about 2% of the underlying stock price but suffers losses of the stock below $101, and gains above $101 to $105.

-The worst case scenario would be if the stock was below $95 where you would be put 100 shares of stock at $95, but the $2 in premium you received would effectively put you the stock at $93. Of course you would suffer losses on your existing stock position.

-The best case scenario would be that the stock is at 105, you have gains of $4 of your stock, and both the call and the put expire worthless and you collect $2. If the stock is above $105 on June expiration your long stock would be called away, but you would have effectively sold it at $107 when you add in the $2 in premium you received for selling the strangle.

MY VIEW:  the move looks cheap, and selling options in the name only look attractive against an underlying stock position.  I would add that its seems that investors are a lot more comfortable with the adverse affects of the strong dollar on large U.S. multi-nationals like JNJ, and weak guidance could be baked in a current levels… for now.