Healthcare giant Johnson & Johnson (NYSE:JNJ) has been one of the quiet performers in 2013. Company shares are trading about 13% higher for the year so far as the healthcare stocks continue to benefit from shifts in their environment.
There’s nothing wrong with Johnson & Johnson’s chart or fundamentals, though you wouldn’t know that from investor sentiment. Options traders, Wall Street analysts and short sellers are positioned for a decline in JNJ. For example, current short interest on JNJ is above 11 times the daily average volume, often a sign that a short squeeze rally may fuel higher prices.
This stock has bested Wall Street’s earnings expectations for more than a year as revenue remains robust, despite ongoing regulations affecting the health care industry. The positive fundamentals have translated into a strong chart with JNJ shares trading in one of the strongest trending patterns that you’ll find within the S&P 500 (chart below).
This low volatility leader appears to be offering a potential double play for traders willing to take both sides of the JNJ trade with different timeframes.
JNJ’s current Relative Strength Index (RSI) is registering overbought readings, signaling that some short-term weakness is likely to knock JNJ from its recent highs. For now, the chart suggests that the active traders may want to position themselves with a short-term put on JNJ to potentially benefit from a healthy correction in the shares.
Current volatilities on JNJ options remains low as a result of the low volatility move that the stock has made over the last three months. This means that the put protection against a short-term decline in JNJ prices is reasonable. We love the JNJ April 77.50 puts as a hedge against the potential short-term correction in the shares. These options are currently priced at 43 cents per contract.
Our eye is on the longer-term technical trend of JNJ shares and a year-end target that is likely to push towards the $100 mark. Like-minded traders should consider leveraging that move by using the JNJ Jan 2014 $80 calls, currently trading with an asked price of $2.38. Again, the low volatility of JNJ options makes these long-term calls a bargain.
The beauty of this combination of traders is that traders can pick-or-choose from them to determine the best strategy for their portfolio. Don’t see a decline in JNJ over the near-term? Buy the January call and pass on the put. However, our preference is to open both options for a total cost of less than $3.00. A short-term pullback to $76 would allow us to net a nice return that we could then use to add to the long call position. Either way you cut it, JNJ appears to be offering an option for the bulls and bears alike.
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