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Jul 16 2011 /
Strategy Article /
Johnson and Johnson Stock - Rolling Put Options
Johnson and Johnson Stock - Put Options
Johnson and Johnson Stock
- Trade Introduction
With July 2011
options expiry, my Johnson and Johnson
Stock $65 put options expired. This
trade commenced back in April 2010 and demonstrates the
value of consistency in sticking with a
plan on a quality company.
This put selling investment in Johnson
and Johnson Stock started in April 2010
when I sold 5 Puts For May at the $65
strike for $1.25. Within just a couple
of weeks
the stock fell until into December when
it almost made a come back only to fall
again
Below is the chart for Johnson and Johnson stock for
the April 2010 to July 2011 period. You can see that
Johnson and Johnson stock has been in a range
between lows around $58.60 to the present high of
$67.74. over the 17 month period. During that period
the puts I sold got deeper and deeper in the money,
yet I was never assigned and continued earning
premium. Now 17 months later Johnson and Johnson
stock has recovered beyond $65.00, releasing my puts
from the possibility of assignment and allowing me
to continue selling puts on JNJ stock.
How To Avoid Early Assignment:
Selling puts that become deep in the money have a
somewhat simple formula to avoid early assignment.
It does not always work, but on Johnson and Johnson
stock the formula works pretty well because the
stock is fairly predictable in relation to, maybe
commodity stocks. It's because of volatility.
Commodity stocks have a lot more volatility than
stocks like Johnson and Johnson stock. And it is not
alone. Other similar stocks include PepsiCo Stock,
Coca Cola Stock, Microsoft Stock, Intel Stock,
Clorox Stock and many more.
For example, below is a 10 year stock history chart
of Johnson and Johnson stock. You can see there is a
distinct pattern over the last 10 years. For traders
this range would be easily traded. For investors
like myself who sell put options this gives a great
deal of comfort when picking strikes. While the $65
is on the high side for selling puts, I can see that
Johnson and Johnson stock has returned to $65
numerous times over the 10 year period. Therefore
for selling the $65 put, I have confidence that at
some point in time Johnson and Johnson stock we
revisit the $65 level and probably leave my sold
puts out of the money.
Below is the 10 year stock history chart for
Microsoft Corporation Stock. Again, the trend is
obvious as the stock has been caught between $22.00
and $28.00 various times throughout the past 10
years. Therefore just like in Johnson and Johnson
stock, when I sell Microsoft Stock puts I have
confidence that my puts will eventually end up out
of the money. Therefore I can keep rolling the puts
and earn income while waiting for the stock to
recover.
The above companies have developed almost a defined
tradeable range. But many stocks do not, in
particular commodity stocks. Below is the 10 years
stock history chart for Pan American Silver Corp
Stock. This would be a very difficult stock to sell
puts against for any long term period.
You can readily see that many stocks would not lend
themselves to long term selling of puts. Below is
another example, the 5 year stock history chart for
Potash Corporation of Saskatchewan. Again this
would be a difficult stock to sell long term puts
against.
When selling long term puts it is important to keep
an eye on the put premiums as the option month sold
get closer. For example with Johnson and Johnson
stock, when I was holding April $65 puts and Johnson
and Johnson stock fell to $58.60 by March 18 2011,
the April $65 puts were trading for $6.50. That
means the puts only had 10 cents of premium left in
them.
Example: March 18 2011 - Johnson and Johnson
stock at $58.60 - $65 put at 6.50 = $65 less
6.50 = $58.50. Only 10 cents of premium in the
put.
This means it is time to buy and close the March $65
puts and roll further out unless I want to be
assigned early on the shares. Even if by rolling out
the premium I earn is not that large, the only way
to avoid assignment is to close and move further
out. I have had positions that when closed and
rolled out four to six months only earned 30 cents
of premium. While it seems perhaps pointless to earn
just 30 cents for 4 or 6 months, remember that
stocks move around a lot and often the stock will
move higher and allow me to buy back those puts that
I sold for just 30 cents and earn double or triple
that much by moving out another 4 or 6 months.
WATCHING THE PUT PREMIUM IN RELATION TO THE STOCK
VALUE IS THE MOST IMPORTANT ASPECT OF KNOWING WHEN
TO ROLL PUT OPTIONS THAT ARE DEEP IN THE MONEY.
Many investors fail to understand how selling
options can be beneficial. In fact, many investors
consider options not investment strategies at all
which is a shame, because as you can see in the
table below which follows Johnson and Johnson stock
for 17 months, selling put options can be a very
successful investing strategy.
JOHNSON AND JOHNSON STOCK
- TRADE HISTORY
TABLE
This trade commenced in April when I sold 5 put contracts for May 2010
at the $65 strike. From there it became a series of rolls in order to garner
income and all the while stay ahead of any
assignment as Johnson and Johnson stock fell. For more than a year I rolled the puts
forward until July 15 2011, when with
Options Expiry, the July $65 strikes were out of the
money as Johnson and Johnson stock closed at $67.45 and the put options expired without
assignment.
Let's look back at the trade to see how it is very
viable to be in certain stock for long periods of time
through rolling put options forward, all the while
earning more and more income.
DATE
STOCK
PRICE
ACTION (all prices shown include
commissions paid)
GAIN/LOSS
TOTAL INCOME
April 17 2010
65.02
Sold 5 Put Contracts May $65 at $1.25
611.75
611.75
April 27 2010
64.80
Bought to close 5 Put Contracts May $65
at .90
(463.25)
148.50
April 27 2010
64.80
Sold 5 Put Contracts June $65 at 1.87
921.75
1070.25
APRIL 27 2010 - SO WHY
ROLL THE PUTS WITH SO MUCH PREMIUM STILL IN
THE MAY PUTS? - Good question! Here is my chart from when I was
following JNJ Stock. Have you ever had a
stock you are selling puts on, fall? The
premium changes as the stock falls and
eventually the premium to BUY TO CLOSE the
sold puts is almost the same as the next
month out when I go to roll my put options
forward. The chart shows
the stock is perhaps beginning to fall after making a
recent high.
My whole goal of selling
puts is to earn income to eventually own
Johnson and Johnson stock but paying for
part of them with other people's money. By rolling
now I can earn a considerable return for
June and still have a gain from April 17,
which was just a few sessions ago. If the
stock falls I will probably end up rolling
further out and earning less then rolling
the puts now. The best premiums are always
in the closest month. By rolling now I can
roll out to just 1 more month, leaving the
future months still open should the stock
fall further quickly.
June 18 20100
59.18
Expiry: Bought to Close 5 Puts JUN 65 at
$5.91
(2968.25)
(1898.00)
June 18 2010
59.18
Sold 3 Puts Oct $65 at $6.60
1969.25
71.25
June 18 2010
59.18
Sold 2 Puts Jan $65 at $7.70
1530.50
1601.75
June 18 2010 - Deep In
The Money Puts Now
ALSO ALWAYS REMEMBER THAT BY ROLLING OUT
JUST 1 MONTH WITH THE STOCK THIS LOW, THE
CHANCE OF BEING ASSIGNED SHARES EARLY IS
VERY HIGH. To avoid this I always make sure
there is premium in my put. If there is no
premium then I buy and close immediately and
roll further out.
Selling puts to earn
capital in order to eventually own shares
but with other people's money requires a bit
of different thinking when it comes to
selling puts. I am not as concerned about
earning big gains each month as often I need
to roll out so far that if calculated
monthly, the return is not that high. But
this is a long term trade and I might be
rolling these puts for more than one, two or
three years before finally being assigned
shares. I have had some trades where I
rolled puts for 7 to 10 years. The
whole strategy is to keep earning capital.
If that means I have to roll further out
with less earnings than I would like, but it
avoids assignment, then so be it. Remember
the goal is to use as much of other's peoples' money
as possible, to pay
for my Johnson and Johnson stock. I can't do
that if I am assigned early.
Therefore on June 18, I split my 5 naked puts into
two lots. I placed 3 puts into October with
low premium earned, but only 4 months away
which gives me an opportunity
for Johnson and Johnson stock to recover and
roll again before January. I then sold 2 puts into January
2011 which generated
much better premiums.
So by June 18 2010 I had earned $1601.75
or 4.9%.
Oct 11 2010
63.23
Bought to close 3 Puts Oct $65 at $1.83
This is excellent as the stock had recovered
a lot of ground and by closing early the
premium cost to close was negligible, but as
explained earlier, the roll out to April
earned excellent premiums.
(559.75))
1042.00
Oct 11 2010
63.23
Sold 3 Puts April $65 at $4.55
I already had 2 Puts Sold for January 2011 at
$65.00. By rolling further out to April this
gives the stock another 6 months to try to
recover higher. Since I still have January
puts I will have an opportunity to roll
those puts for more income as well.
1354.255
2396.25
Dec 31 2010
61.85
Johnson and Johnson stock has fallen over the past few
months. I have no choice but to close now as
at $3.10 there is only .05 cents of premium
left. Remember - I do not want to be
assigned shares yet. I wish to continue to
roll them and earn more income.
(629.50))
1766.75
Dec 31 2010
61.85
Sold 2 puts February $65 at $3.55
Now there is enough premium that I can roll
just 1 month out. Recalling my earlier
comment, This allows me to earn
better premiums as the closest month always
has the highest option premium.
700.500
2467.25
Feb 18 2011
61.00
Johnson and Johnson stock hadn't done much for over a month
and with it this low it was time to roll it
again as there was just 15 cents premium in
the put.
(839.50)
1627.75
Feb 22 2011
60.90
Sold 2 puts July $65 at $4.95
With the stock so low, and the VIX (Volatility
index) also very low since the market is
moving higher, I had to go all the way out
to July just to earn some premium and avoid
being assigned shares.
980.50
2608.25
Mar 18 2011
58.60
Bought to close 3 puts April $65 at
$6.50
Johnson and Johnson stock continued to fall and the premium
in the puts was just 10 cents. It was time to
roll these puts again. I had decided to
again split the puts
(1960.75)
647.50
Mar 18 2011
58.25
Sold 2 puts Jan $65 at $9.05
I had now sold just 2 puts and the loss was
$160.75 to drop 1 put. This freed up $6500
in capital being held to assist purchasing
the puts. I then sold 1 additional put but
further down in price. I had to adjust this
trade a bit from the
Johnson and Johnson stock 2011 actual trades as I
did 2 puts rather than 1 put. In order to
keep this trade accurate for the sake of
this article I will show just 1 put sold.
(In my actual trade I did 2 puts as I have a
lot of confidence in Johnson and Johnson
stock)
1800.50
2448.00
Apr 15 2011
60.56
Sold 1 put October $62.50 at $4.15
I am now still holding 5 puts, but only 4
are now at $65.00. To move 1 put lower cost
me $160.75. But now I have 1 put at $62.50
and 4 at $65.00. By going out to October
which is 6 months) with this put I have
earned far more than the $160.75
Here is the breakdown of the puts being
held:
2 Puts for July $65
2 Puts for Jan $65
1 Put for Oct $62.50
406.75
2854.75
Jul 15 2011
67.45
Options Expiry for July - 2 Puts for
July $65 expired out of the money.
Now holding
2 Puts for Jan $65
1 Put for Oct $62.50
Return on capital invested at this point:
$2854.75 / $32250.00 (400 shares at $65.00
and 100 shares at $62.50) 8.8%.
Jul 15 2011
67.45
interest earned in high interest savings
account since April 17 2010 - Total Capital
set aside to cover sold puts - $31,250
480.25
3335.00
At this point with the stock
at $67.45 and the stock market possibly
ready for a pullback, I could either sell
further out in time these 2 puts and at a
much lower strike. For example the October
$62.50 is at .90 cents. I could also
consider going out to January and sell the
Jan $60.00 at $1.36 or the $57.50 at $1.00.
Since I am already holding 2 puts for Jan
$65 and 1 put for Oct $62.50, I would
probably consider the January $60 at $1.36.
If assigned on all the shares at these
strikes my total cost for the trade is
$31,250.00 less earned capital - $2854.75 +
Jan $60 puts for $262.50 put premium earned
+ interest earned- $480.25 = $27652.50 / 500
shares = $55.31. The present annual dividend
is 2.28 which provides a yield of 4.1%.
Not bad for just a year and half of work. If
I was willing to take the shares I know that
my own capital in the stock is just
$27652.50 and I am earning 4.1% a year on
that capital or $1140.00 a year with the
chance of annual dividend increases.
Johnson and Johnson Stock - Trade Summary
There are a couple of things to consider when
reviewing this trade. I kept selling the $65 strike
despite the stock falling more than 10% below that
strike. During this time period it was very possible
to reduce the number of puts at that strike and sell
some puts at lower strikes which still could
generate a credit. This meant that I am basically
averaging lower into the stock.
Therefore selling puts is not necessarily a case
of pick a strike and then be stuck at that strike.
When an investor considers the strategy of selling
puts long term on a stock they wish to own, it is
obvious that they can continue to generate income
and reduce their overall cost basis in the stock. It
is a matter of avoiding assignment by staying ahead
of the stock movement through watching put option
premium to know when the premium is low, increasing
the chance of early assignment. At that point roll
the puts further out in time while still earning
income. As well with stock price fluctuations it is
possible to split up the put contracts and roll some
lower, all the while working yourself lower into the
stock and still earning income.
There is a lot to like when it comes to selling
puts on Johnson and Johnson Stock.
