JNJ Analysis

The health-care products company Johnson & Johnson (JNJ), headquartered in New Brunswick, New Jersey, publishes earnings on Tuesday prior to the opening bell.

[JNJ in Wikipedia]

JNJ

I shall use the NOV series of options, which trades for the last time 32 days hence, on Nov. 18.

Ranges

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.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	125.09	132.07	120.05
Lower	111.15	104.17	116.19
Gain/loss	±$6.97	±$13.95	±$1.93

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

JNJ peaked in July, ending a rise that lasted for nearly a year and now undergoing a sideways correction.

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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.

Bull put spread, short the $115 puts and long the $110 puts,
sold for a credit and expiring Nov. 19.
Probability of expiring out-of-the-money

NOV	Strike	OTM
	115	66.5%

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

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



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Based on a work at www.timbovee.com.