JNJ Analysis

The health-care products company Johnson & Johnson (JNJ), headquartered in New Brunswick, New Jersey, closed above its 20-day price channel on Monday. The stock has low historical odds of profitable bull signals and low implied volatility relative to its one-year range and so is a candidate a covered call or an all-options alternative, such as a diagonal spread.

[JNJ in Wikipedia]

JNJ

For the short leg, I shall use the JAN series of options, which trades for the last time 38 days hence, on Jan. 16, and for the long leg, the JUL series, which completes trading on July 15, 220 days from now

Ranges

Implied volatility stands at 15%, which is 9/10ths of the VIX, a measure of volatility of the S&P 500 index. JNJ’s volatility stands in the 10th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	107.48	112.54	N/A
Lower	97.36	92.30	N/A
Gain/loss	4.9%	9.9%

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

JNJ began a downtrend in November 2014 and hit a low on Aug. 24, the day of the China Panic. It has since bounced up in a counter-trend correction.

Zacks Investment Research gives JNJ a neutral ranking of 3.

Diagonal spread, long the $105 calls expiring Jan. 17 and short the $100 calls expiring July 16 bought with a credit. Probability of expiring out-of-the-money

	Strike	OTM
JUL	100	36.4%
JAN	105	73.3%

For the long leg, the premium is a debit of $6.10, and for the short leg, a credit of $0.80.

Decision for My Account

I'm declining the trade. The $5 interval between strikes makes it difficult to construct a trade that will provide sufficient return within my sizing requirements. The wide interval between the two probabilities of expiring out-of-the-money is the tip-off.

-- Tim Bovee, Portland, Oregon, Dec. i8, 2015

References

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


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.