JNJ Analysis

The health-care products company Johnson & Johnson (JNJ), headquartered in New Brunswick, New Jersey, closed above its 20-day price channel on Wednesday. With an historical tendency toward whipsaws after bullish trading signals and low implied volatility relative to its range for the past year, JNJ is a candidate for a time spread.

[JNJ in Wikipedia]

JNJ

For the short leg, I shall use the DEC series of options, which trades for the last time 30 days hence, on Dec. 18, and for the long leg, the APR series, which completes trading on April 15, 2016, 148 days from now.

Ranges

Implied volatility stands at 17%, which is about the same as the VIX, a measure of volatility of the S&P 500 index. JNJ’s volatility stands in the 20th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	107.28	112.35	N/A
Lower	97.16	92.09	N/A
Gain/loss	5.0%	9.9%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

JNJ has completed four bull signal sin the past year. One was successful, yielding 2.8% over 29 days. Three were failures, on average losing 1.5% over 17 days.

Stocks with low odds of a bull signal being valid and with low implied volatility are candidates for a time spread, such as a diagonal.

There's a difficulty with the options grid: The $5 spread between strikes means the first out-of-the-money strike has a very high chance of expiring profitably, which lowers the premium, and therefore the likely income, by a very large degree.

Diagonal spread, long the $100 calls expiring April 16, 2016  and short the $105 calls expiring Dec. 19, bought with a credit. Probability of expiring out-of-the-money

	Strike	OTM
APR16	100	48.7%
DEC	105	81.2%

The premium on the long leg is $4.95 and on the short leg, $0.40, for a $4.55 net debit, which is 91% of the width of the position’s wing. The stock at the time of entry was priced at $102.06.

Decision for My Account

The short-leg's high probability of expiring out-of-the-money means there is insufficient return from premium to make the position worth my while. I'm declining to take the trade.

-- Tim Bovee, Portland, Oregon, Nov. 19, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.