Johnson & Johnson (NYSE:JNJ) is lacing up its tap shoes in preparation for its upcoming earnings dance. The consumer staples stock is slated to perform for the denizens of the Street in the wee hours of the morning next Tuesday, April 18. And that means it’s high time for JNJ stock lovers to ready some earnings trades for deployment.
The normally sleepy stock has been on a tear of late. Year-to-date, Johnson & Johnson is up 9%, which is notable for a staid old staples stock. Since notching a new all-time high last month at $129, Johnson & Johnson shares have quietly retreated a couple of bucks to their current perch.
Though its short-term trend has flatlined, the stock remains in a bullish intermediate- and long-term trend.
As for earnings, JNJ stock isn’t exactly known as a massive mover and shaker during these quarterly rituals. You can blame the lackluster action on its industry. Unlike technology, the business models of consumer staple companies — particularly those as old and well-diversified as Johnson & Johnson — are quite stable.
Johnson & Johnson Stock Chart
In truly randomized fashion, its past four earnings announcements have delivered two up gaps and two down gaps. As usual, implied volatility is ramping ahead of next week’s event as options traders bid up premiums.
To identify just how much movement investors are pricing in, we can look at the value of a long straddle. The $125 strike straddle that expires next Friday is trading just under $3. And that means market expectations are for JNJ to trade in a range between $122 and $128 over the next seven trading sessions. That’s inclusive of earnings, obviously.
So it’s not as if spectators are anticipating any major fireworks. A $3 move in a $125 stock translates into a mere 2.4% move.
The JNJ Earnings Trade
With the stock already entrenched in a solid uptrend and earnings being largely a non-event, I think bull put spreads make sense here. It positions you to capitalize on continued upside in the stock price plus the implied volatility crush that will strike after next Tuesday’s event.
Sell the May $120/$115 bull put spread for 50 cents. The initial premium represents the max reward, and you will capture it if JNJ stock sits above $120 at expiration.
The max risk is limited to the distance between strikes minus the net credit, or $4.50. You will forfeit the max risk if the stock somehow gets obliterated and tumbles below $115 by expiration.
At the time of this writing, Tyler Craig held no positions in any of the aforementioned securities.
