Johnson and Johnson Stock has been in my portfolio for a great many years. I have done very well with Johnson and Johnson Stock through a combination of Put Selling and Covered Calls. This Johnson and Johnson Stock link will take you to my 2012 trades. Johnson and Johnson Stock symbol is JNJ and it trades on New York. If you look at the trades for 2012 you can see that I am only holding 3 naked puts for Johnson and Johnson Stock at the $57.50 strike for January 2013. All the rest of my trades have either expired or been bought to close. With the recent rise in Johnson and Johnson stock I have waited for an opportunity to get back to Put Selling but as always, patience is key when Put Selling against my favorite stocks. Because I stay with just a handful of stocks sometimes when the market rises, all my stocks rise and this places my Put Selling on hold. Select this Johnson and Johnson Stock link to review Financial Information.
Put Selling For Income
Put Selling for income doesn’t have to be all about risk. Instead by selecting large cap blue chip stocks that pay decent dividends, I have some protection right from the outset by staying with these types of stocks. Next up is how widely held they are and by whom. Johnson and Johnson stock for example, is held by large institutional players and pension funds. That puts a lot of support into the stock as well. Finally by waiting for weakness in the stock I can be Put Selling during periods of higher volatility in the stock, such as today.
The key to Put Selling for income against a stock like Johnson and Johnson Stock is to put in place a strategy that takes into account the type of stock and the low-level of volatility. Low volatility makes Put Selling for large premiums at out of the money puts a lot more difficult. But if you look at the chart below you can understand further the key to Put Selling a stock like Johnson and Johnson stock. It’s all about having a plan and the importance of strategy.
Johnson and Johnson Stock 3 Month Price Chart
The Johnson and Johnson Stock below shows that the $67.50 support is nearing the top end of the recent high for the stock. Put Selling at this level could end up seeing my puts assigned should the stock fail to hold the recent highs. You can see in the 3 month chart that there is limited support at $67.50. So why would I engage in Put Selling at this level?
It’s about the strategy.
Put Selling for income against Johnson and Johnson Stock needs a plan and strategy to be consistently successful.
Johnson and Johnson Stock Put Selling Strategy
First I recommend that if the goal is to NEVER own shares of Johnson and Johnson Stock then the Put Selling strategy discussed is not what an investor should consider. The likelihood of shares being assigned is probably 50/50 at the $67.50 put strike. The bulk of support in Johnson and Johnson Stock is at $62.50. Use of margin for Put Selling would best be applied to the $62.50 put strike level or below.
The Johnson and Johnson Stock Plan
The plan is to continue Put Selling just below the recent high in Johnson and Johnson Stock as I believe there is a good chance the stock will move higher than $70.00 between now and the fall. Dividend stocks are back in vogue and Johnson and Johnson Stock is among the bluest of blue chip dividend payers. This stock has a very strong following and those interested in collecting dividends are drawn to stocks like Johnson and Johnson Stock. The annual dividend is $2.44 which at $67.50 works out to 3.6%. The S&P 500 average is 1.9%. Johnson and Johnson Stock dividend is almost double the index average. The plan then is to continue Put Selling for income and at some point accept shares and then sell covered calls until exercised out.
The Put Selling Strategy
The Johnson and Johnson Stock high back in early April before the correction hit the S&P 500 was $66.30. By Put Selling against the $67.50 put for .90 cents or higher I am effectively gaining entry to Johnson and Johnson stock at $66.60 or just slightly above the April high of $66.30.
Should the stock fall and I be assigned at $67.50 I would turn around and sell the $67.50 covered calls on Johnson and Johnson Stock. However there is a lot more to the strategy. By selling only 5 naked puts at $67.50 this leaves lots of room to do more Put Selling at lower strikes if the stock should pull back lower.
I believe there is the possibility of the stock falling to the April high of $66.30 within the next month if weakness develops in this latest S&P 500 rally.
If that happens I would end up Put Selling the $65.00 puts and then use margin to be Put Selling the $62.50 strike.
Theoretically I would sell puts in this fashion:
5 Johnson and Johnson Stock $67.50 puts for .90 cents, equals $33,750.00 in capital less $450.00 in income earned.
If the stock moves lower Put Selling would resume at $65.00. Options premiums would probably be around .50 cents with the stock at $66.30
5 Johnson and Johnson Stock $65 puts for .50 cents equals $32,500 in capital less $250.00 in income earned
Then margin would be used for Put Selling at the $62.50 strike for smaller premiums. The $62.50 Johnson and Johnson Stock puts would probably be around .25 cents 1 month out.
10 Johnson and Johnson Stock $62.50 puts for .25 cents equals $31,250 in capital less $125 in income earned
Total of my capital being used = $66,250 less $825.00 earned through Put Selling, places my capital required at $65,425 or $65.43 cost basis in the stock.
$65.43 would make covered call selling at the $65 strike pretty simple. As well I would then use margin for more put selling at $62.50 or even $60.00 put strikes depending on where Johnson and Johnson Stock is at that time.
The Importance Of Having A Plan When Put Selling
You can see from the above theoretical trade that I have in place a plan should the stock fall lower. The plan allows for me to earn additional income and protect my sold puts against a severe loss should Johnson and Johnson Stock fall lower than anticipated.
There are lots of other strategies that can be applied. For example if Johnson and Johnson Stock should fall below $67.50 I can buy back and roll out two months at the $67.50 strike. This delays being assigned and earns more put premium. If this should happen, I would also close my $65 naked puts and roll those two months out at the $65 strike. I would then continue to use margin to sell the further out of the money puts.
All of this would be done to bring in more income from selling puts which reduces the cost basis of when the stock is or if it is finally assigned.
Put Selling Strategy Is Important
It may seem strange to put in place a strategy that may never be needed or may not work out quite as planned. But having a plan and the strategy to meet that plan is important as it helps to reduce anxiety and emotion when a trade goes sour. When Put Selling against a stock like Johnson and Johnson Stock may seem simple and easy at the outset, it is nice to know that a surprise down the road can be dealt with by either using the original plan or by tweaking it to better suit the changes in the underlying stock.
For example if Johnson and Johnson Stock instead of falling to $66.30 fell to $64.30, the strategy can be changed to
1) accepting shares at $67.50
2) immediately selling covered calls 6 months out to capture the Johnson and Johnson Stock dividend and covered call option premiums to reduce the cost basis on the stock.
3) start Put Selling at $62.50 rather than $65.00
4) use margin to be Put Selling at $60.00 or even $57.50 should the stock fall further than anticipated. Use of margin at these levels is basically just boosting the income earned from selling options while keeping margin low enough that risk of assignment is small.
By having an outline of a plan in place prior to commencing Put Selling against Johnson and Johnson Stock I am well prepared to handle whatever the stock market holds at me and by staying cautious and selling small quantities of naked puts I can use any number of rescue strategies to keep my Put Selling trade on Johnson and Johnson Stock profitable because after all, the goal is Put Selling for income not losses.
This simple strategy can be applied to most big cap stocks. If you have a stock you would like me to plot such a strategy against post it to the comments section below and I will write up a similar article. By having a plan in advance of doing the trade you are stacking the odds in your favor of earning consistent profit through Put Selling options for income whether with Johnson and Johnson Stock or any other in your portfolio.