One theme I have emphasized the last few weeks is the need to take advantage of the high implied volatility in the market during this outbreak. Traders can collect plenty of income by selling far out-out-of-the-money options.
Regular readers will remember that one effect of these rapid shifts in the market is higher implied volatility, which is the market’s forecast of how any security is likely to move.
Higher implied volatility means stocks are more likely to make big moves. That means options, even those that are far from being in the money, are offering greater premium to traders that sell them.
Most of the large moves in the last week have been to the downside, so put options are especially profitable right now.
However, traders need to be selective with their options, and Johnson & Johnson (NYSE:JNJ) has proven itself resilient.
JNJ’s Performance Compared to its Sectors
Almost every stock has been hit by these selloffs, but not every struggling stock has fallen as much as the broader market.
JNJ is both a healthcare and pharmaceutical stock, and it has actually outperformed both of those sectors.
If you look at the chart below, you can see that since the beginning of 2020, JNJ has lost less value than both the SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH) — the blue line — and the Health Care Select Sector SPDR Fund (NYSEARCA:XLV) — the orange line.
Daily Chart of JNJ, XPH and XLV — Chart Source: TradingView
There are a few potential reasons JNJ is outperforming other healthcare and pharmaceutical stocks.
JNJ announced that its product darunavir, which is an antiviral used in treating HIV patients, doesn’t combat the novel coronavirus SARS-CoV-2 or COVID-19, the disease caused by the virus. While that may not be good news, the press release also mentions that the company is fast-tracking COVID-19 research.
JNJ is large enough that this news won’t provide it much of a boost — it has many other segments that could suffer — but the stock might fare better than those that aren’t contributing to a solution for this problem.
JNJ is Above its 2018 Low
Looking at the chart below, you can see that JNJ has broken below support at around $125. I don’t think support is as meaningful when dealing with a “black swan” even like COVID-19. Instead I want to look at JNJ’s lows during the 2018 crash.
Daily Chart of Johnson & Johnson (JNJ) — Chart Source: TradingView
In the blue circle, you can see that the stock fell below $120 per share, which it hasn’t reached since.
There is still a chance that JNJ could drop lower, especially if the rest of the market falls. But we are still mostly giving up 2019’s gains
Investors have pushed up the price of out-of-the-money options so high that we can sell puts with a strike price well below JNJ’s current and 2019 lows.
With a strike set at $95 and an expiration set for this Friday, we can collect quick income on this position.
Sell to open the JNJ March 20th $95 put at about $0.65.
Note: Be sure you are opening the monthly JNJ options that expire on Friday, March 20, 2020.
This is a high-risk trade, so take a small position.
About Naked Put Writes
A naked put write is a bullish position in which you expect the price of the underlying stock to increase.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.