Johnson and Johnson Stock (JNJ) Put Selling Profitably and Safely In Any Downturn

Johnson and Johnson Stock has been in my portfolio for almost as long as I have been investing. Johnson and Johnson stock trading symbol is JNJ. A lot of investors interested in Put Selling shy away from Johnson and Johnson stock as they feel it offers little reward for the risk of being assigned, as the put premiums tend to stay lower due to the lower volatility.

Personally I look at this stock more from a safety first aspect and reward second.

Johnson and Johnson Stock and Claims Settlement

The stock in recent days has moved lower as obviously today’s announcement about Johnson and Johnson trying to settle hip replacement lawsuits for about three billion dollars was already being leaked. Stock manipulation is a constant daily event which we as small investors have no control over. But I can benefit from it by keeping a watch list of stocks and setting up daily alerts. It was obvious to me after the run-up in the stock that Johnson and Johnson Stock was overvalued above $90.00.

On the first leg down the stock got to $88.77 on August 16, then a little rebound followed. I have waited for the second test of the same level to see if it can hold. That test is taking place today (Aug 21 2013)

Safety First on Johnson and Johnson Stock

Earlier this summer I was using the Walk That Profit Home to Momma strategy on Johnson and Johnson Stock. Basically that strategy was in use as long as Johnson and Johnson Stock was climbing against the Upper Bollinger Band. This strategy is well explained and outlined in this article so I won’t go into it in detail, but suffice to say it is a strategy of selling in the money puts on stocks I would own if assigned as they rise. Part of the reason for this is as the stock rises, should it pull back unexpectedly and I am assigned, the capital earned greatly offsets a shallow decline and makes selling at the money or in the money covered calls to unload the stock, simple and profitable. The chart below shows the period when I was using the Walk That Profit Home to Momma strategy on Johnson and Johnson Stock in the early part of the summer. However once Johnson and Johnson Stock moved above $90, the stock was overvalued in my opinion and I bought and closed my sold puts with the stock pushing $94.00. I never use any strategy on a stock I consider overvalued. Instead I wait for investors to realize that the stock is overvalued and they sell it back down.

Johnson and Johnson Stock Support Levels and My Put Strikes

I have done exceptionally well over the past 5 years with Put Selling against Johnson and Johnson Stock. Each year has seen double-digit returns against the capital I have invested in JNJ Stock. This year though I felt that Johnson and Johnson Stock got ahead of itself when it pushed beyond $90. Let’s look at the past year of Johnson and Johnson Stock using volume and price to spot areas of support.

For those new to finding levels of support based on volume I have drawn a line across the average daily volume which is around 8 million shares in 2013. That means that every day about 8 million shares of Johnson and Johnson Stock trades hands. When volume spikes I look for selling or buying pressure to see which was the stronger. Green represents buying pressure and red selling pressure.

I then plot out the average price being paid during those periods and then compare it to previous periods to see how often the prices show up. The more often the price shows, the more investors are holding shares at those valuations and the more support Johnson and Johnson Stock has at that price point.

Looking at the chart since January 2013 you can see that there is a lot of support around $84 which shows up fairly often. The next level which shows up at least twice is $87. The other areas of the stock such as $73, $79, or even $90 have limited support.

Based on the volume indications I can see that the first line of support is probably around the $87.00 level which is why I sold the $87.50 put strike. For one thing it is easily defended. If Johnson and Johnson Stock falls to $87.50 I can immediately roll down to $85, which is just above the second level of support which is around $84.

Put Selling Johnson and Johnson Stock Strategy

You can see from the above charts why I picked the two strikes I did today, namely $87.50 and $85. I will not be surprised to see the stock pull back to $87.50 but there is enough support at $87 that it could take time and it may result in a very choppy few weeks getting there which will allow me to either buy back my September 21 expiry $87.50 naked puts for a profit or roll them down and stay profitable. In other words I am not expecting a plunge lower in JNJ Stock but more a gradual decline with bounce backs.

The October $85 naked puts I sold should be very easy to defend because there is good support at $84 which if necessary would allow me to roll down and out for a profit. Meanwhile though, if Johnson and Johnson Stock stays choppy then there is a good likelihood that I can close the October $85 puts for easily 50 cents, sometime before the end of September which is a 50% return on the naked puts sold.

Not Rolling Sideways

Like every trade there has to be a strategy. The strategy for this trade is to roll out and down, but NOT sideways. I believe Johnson and Johnson Stock is overvalued at $90 and above. I think fair value is down at $80 to $75 and below $75 it is undervalued. Therefore with this knowledge it makes no sense to roll out and stay at the same put strike, namely $87.50 and $85. Both of those areas I do not consider fair value. Instead I consider them good strikes for Put Selling based on support levels, but if those levels break it is best to roll out and down to lower put strikes and work my way into fair value.

If I were to be assigned shares I would want them to be at fair value which is $80 to $75. Therefore if something unexpected were to happen, I would eventually work my way to those valuations. Once I reach fair value with my Put Selling, I would then discontinue rolling lower and instead roll sideways to the same put strike which will bring in larger premiums than rolling down.

Acting On The Goal with Johnson and Johnson Stock

The problem option sellers have is their inability to act quickly once a goal is established. For example in my case I know that the moment $87.50 is breached, I would immediately roll down and out in time. There is no waiting to see if the stock bounces back. It is consistency of implementing the defensive strategy that makes the trade work, controls risk of loss to my capital in use and keeps the trade including any roll down, profitable.

For example if I did wait and the stock moved back up above $87.50 then the trade would end well for my portfolio and there was no need to roll my naked puts down. But at the same time if I roll out and down for a profit, even if a small one, and then the stock moved back up above $87.50, the outcome is still the same. The trade ends well and my portfolio profits from it. Therefore there is no reason to hold off on the roll down when in essence the outcome is the same. If however I wait too long to roll down and end up with deep in the money naked puts on Johnson And Johnson Stock it is far more difficult to roll down for a profit. In almost every case the roll down will result in a net debit.

Having the goal in place and the strategy at the ready means, no emotion to the trade and no panic to the roll out and down. By knowing the goal in advance and the strategy that will be used to defend my position I am able to protect my capital from losses and keep my trades consistently profitable. That is the goal of the two trades done today in Johnson and Johnson Stock.