Market Insights

Johnson & Johnson doesn’t move quickly, but options traders may see ways to make it interesting.

The pharmaceutical company has formed some potentially bullish patterns since July 17, when it rallied on strong quarterly results.

First, the stock advanced from about $151 to almost $169 a month ago. It then retraced half the move before stabilizing. Some chart watchers may consider that confirmation of a new upward move.

Second, the last two weeks have seen prices revisit the 50-day moving average. The stochastic oscillator has also fallen to an “oversold” condition, from which it’s starting to bounce.

Those points could be viewed as potential evidence that a healthy pullback has occurred, creating potential opportunities to position for a a bounce.

The 50-day MA also had a “golden cross” above the 200-day MA in late August. That may indicate a bullish uptrend has begun over the longer term.

Know Your Options

Traders with an eye on the chart and calendar may see potential opportunities in this situation. They may notice that the next earnings report is on October 15, shortly before this month’s options expire.

They may also notice that JNJ peaked near $176 in August 2023. Some investors may look for prices to approach that level if the recent uptrend continues.

Such a possibility can be turned into a options strategy. For example OptionStation Pro yesterday showed an offer price for $1.17 on October 167.50 calls. The October 172.50 calls had a bid of $0.29. Traders might consider combining the two contracts in a vertical spread, purchasing the lower strike and selling the higher strike.

That kind of position would cost about $0.88 and leverage a move toward JNJ’s old highs. It would turn profitable above $168.38 and be worth $5 at or above $172.50. That’s a potential gain of 468 percent versus the entry cost. It would also expire worthless if the stock remains below $167.50 through October 18.

JNJ shares ended yesterday down slightly at $161.99.

Volatility and Leverage

How might such a trade work? Calls fix the price where a security can be purchased, so they can appreciate rapidly when shares advance. Traders can buy them to position for a rally, or sell them to generate a credit. Spreads involve buying and selling to minimize cost. While the strategy can leverage a move between two levels, gains are capped at the higher price.

JNJ is relatively slow-moving name. TradeStation data shows its historical volatility is around 12 percent and implied volatility is around 17 percent. Both of those are in the bottom 10 percent of the overall S&P 500. That also makes its options less expensive, which creates the opportunity for greater leverage.

In this case, JNJ would need to move about 6.5 percent for the October 167.50 – October 172.50 call spread to potentially earn 486 percent.

Volatility is about 4 times higher on a stock like Tesla (TLSA), so it would require a bigger move to generate a similar return. For example, TSLA’s October 280 – October 305 call spread cost about $4.82 yesterday. That implies a smaller potential profit of about 419 percent, but would need the underlying stock price to rally 19 percent.

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