[JNJ in Wikipedia]
I shall use the NOV series of options, which trades for the last time 32 days hence, on Nov. 18.
Implied volatility stands at 20%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index.JNJ’s volatility stands in the 54th percentile of its annual range. The price used for analysis was $118.12.
|Week||SD1 68.2%||SD2 95%||Earns|
JNJ peaked in July, ending a rise that lasted for nearly a year and now undergoing a sideways correction.
by Richard D. Wolff
Although the stock is ranked neutral by Zacks Investment Research, there are indications of analysts adjusting their forecasts in expectation of an earnings surprise.
Moreover, JNJ's options grid ha $5 gaps, making it difficult to construct a direction-neutral position using an iron condor structure. The earnings surprise gives me a reason to use the simpler bull put spread structure.
sold for a credit and expiring Nov. 19.
Probability of expiring out-of-the-money
The premium is $0.79, which is 16% of the width of the position’s wings.
The risk/reward ratio is 5.4:1.
The zone of profit in the proposed trade lies $3.14 below the current market price. The biggest immediate move after each of the past four earnings announcements was $4.78, and the average was $2.30. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.93.
Decision for My Account
The risk/reward ratio is unacceptably high, and yet this is the best I can do on the JNJ options grid. Using my $500 maximum risk model, I can only buy one share, which produces a $77 maximum profit. Under my guidelines, I won't take a trade for under $200 potential profit.
I'm passing on JNJ. No trade.
The stock at the time of entry was priced at $118.14.
-- Tim Bovee, Portland, Oregon, Oct. 17, 2016
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.
Two social media feeds provide notification whenever something new is posted.
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.