JNJ – Johnson & Johnson – Shares of the world’s largest maker of health-care products are lower by 1.90% to $58.64 in morning trading. Put activity on the stock suggests one pessimistic player is bracing for further bearish movement in the price of the underlying shares ahead of June expiration. Perhaps pessimism on JNJ stems from the continuing – and now expanded – investigation into drug manufacturing at the firm following the “phantom recall” wherein, allegedly, Johnson & Johnson hired contractors to buy up defective Motrin tablets in stores rather than issue an immediate formal recall of the medication. JNJ officially recalled more than 40 children’s medications on April 30, 2010. Johnson & Johnson shares are down 10.25% since the April 30th recall. Regardless of the motivation for the bearish put activity, the put spread strategy implemented in the June contract this morning suggests shares could fall significantly lower in the next few weeks. The investor responsible for the trade purchased 1,000 puts at the June $57.5 strike for an average premium of $0.67 apiece and sold the same number of puts at the lower June $55 strike for a premium of $0.22 each. The net cost of the spread amounts to $0.45 per contract. Thus, the trader stands prepared to make maximum potential profits of $2.05 per contract if JNJ’s shares fall another 6.2% to breach $55.00 by expiration day. The overall reading of options implied volatility on the stock is up 10.1% to 21.54% as of 11:05 am (ET).
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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