If it wasn’t for the plunging stock market intertwined with government bailout plans and Fed rate interest cuts, the biggest story right now would be earnings season.

But, as it stands, we don’t recall an earnings season that’s been met with such indifference, or one where expectations were any lower. Still, healthcare stocks are seen as safe havens during recessionary periods, and it’s true the sector has been one of the stronger groups during the recent correction for a couple of reasons.

To begin with, the sector’s fundamental characteristics have been supported by earnings stability from such companies like Johnson & Johnson (JNJ) and Kimberly-Clark (KMB).

What’s more, healthcare and consumer staples names are deemed more defensive in recessionary conditions and, thus, are considered safer ways to play.

Playing JNJ the Earnings Way

A recent pullback in JNJ was met by a rush of pessimism, which suggested the stock was oversold. Around Oct. 9, this selling opened a window of opportunity around to catch the stock at a discount just ahead of its earnings report. We upped our discount by buying call options for a fraction of the stock price.

Overall, our trading strategy at The Winning Edge involves finding the best bullish plays. We look for outperforming stocks that have been beaten down by pessimism — or at least were targets of the skeptics. That’s exactly what we saw with Johnson & Johnson.

JNJ hit our radar for several reasons — one of the biggest was that, at the time, it was set to report earnings. JNJ hasn’t fallen short of an earnings estimate in nearly three years, and it didn’t disappoint in this latest round.

The Street’s View is Sometimes Askew

Analysts were calling for just a nickel increase compared to last year, but JNJ hadn’t had that insignificant of a year-over-year gain since an earnings miss in January 2006. To us, this indicated JNJ wouldn’t have any trouble besting expectations again (it ultimately showed a 6-cent increase, which beat estimates by a penny. And, in this market, sometimes that’s all it takes).

But one of the stock’s more impressive aspects was how it has performed against the broader market. While it’s true the market has been terrible, JNJ’s performance chart against the S&P 500 (SPX) is nevertheless impressive.

We’re certainly couldn’t ignore the fact that JNJ has taken its lumps along with the rest of the stock market — and we’re aware that the “low” can always go lower. But our signals showed that if the overall market moved toward stabilization, JNJ was well-positioned for a rebound.

Its most recent sell-off, the latest in a series of freefalls, pulled JNJ to historical support levels around $55. We foresaw a strong bounce off this solid support that could have resulted in a 20% gain within a few weeks, especially if earnings met or beat estimates.

There’s a Reason We Call it the ‘Dumb Money’

Other options players were loading up on the puts, resulting in a peak of the put/call ratio just below those that coincided with short-term stock lows in May and June. And analysts — while typically positive toward the company, with eight of 13 listing it as a “Buy” — left room for more upgrades.

Everyone wants to follow what they perceive as the “smart money” — that is, institutions, hedge funds and other organizations with cash-filled coffers. But there are lots of other players out there whom we like to call the “dumb money,” as their bets — often placed in large volume — might give the indication that they know something we don’t.

But remember when you were asked as a child, “Would you jump off a bridge if all your friends were doing it, too?” This is a question you must ask yourself when getting into trades, especially when you’re trading options. Always consider the source when deciding what to do with your money!

The Picture of (Economic) Health

Given the huge sell-offs the market has suffered during the past weeks, going long anything may seem like a risky proposition. But ours is always a game best played by gaining an edge. We believed fully in JNJ’s fundamental strength, and analysts’ significant pessimism and the stock’s major support levels helped to define that edge.

We figured that just a 10% to 15% upside bounce in JNJ could give us a gain in excess of 100% in about two to three weeks — we were looking for fast money, so we recommended buying some JNJ November calls, which gave us enough time to play its October earnings announcement and to hit the exits after its numbers hit the tape.

When choosing our positions, one important driver is the options open interest configuration. We look for strike prices with significant amounts of calls and puts to offer potential levels of resistance and support, respectively.

We recommended a position that people could have picked up for around $2.60 a share, or about $260 per contract.

And, in the end, the stock jumped 11.9% from its Oct. 9 to a post-earnings pop. As predicted, just a few days later on the heels of JNJ’s earnings announcement, those same calls rocketed up to the $6 mark. More than a doubler in less than a week — that’s what this kind of market can do.

And what we can do as options traders is use the conventional wisdom — for instance, that healthcare stocks are smart places for money during economic downturns — and combine our fundamental data with strong options plays that return far more than stocks do with far less capital and in far less time.