JNJ – Johnson & Johnson – Shares of the provider of consumer products, pharmaceuticals and medical devices fell more than 2.85% in afternoon trading to arrive at $56.89 just before 3:00 pm (ET). The health care company’s shares slipped lower after the firm said second-quarter revenue was flat and lowered its 2010 profit forecast by $0.15 a share. JNJ still reported a 7.5% increase in net income, earning $1.23 a share in the second-quarter, but revising full year earnings lower took its toll on the price of the underlying stock today. One contrarian options player populating JNJ LEAPS caught our eye this afternoon. The investor appears to have purchased a plain-vanilla debit call spread using sky-high strike prices in the January 2012 contract. The trader responsible for the spread picked up 3,600 calls at the January 2012 $80 strike for an average premium of $0.38 apiece, and sold the same number of calls at the higher January 2012 $90 strike for an average premium of $0.10 each. The net cost – and maximum possible loss faced by the investor – in this transaction amounts to $0.28 per contract. JNJ’s shares have never come close to trading above $80.00. Thus, it is unlikely this investor expects the price of the underlying stock to rally 41.1% in the next year and a half in order to exceed the average breakeven point on the spread at $80.28. Perhaps the trader is, however, anticipating bullish movement in JNJ’s shares by expiration in January 2012. Such share price appreciation, or increases in options implied volatility on the stock, will inflate premium on the calls and could allow the investor to take profits by selling to close the spread at an advantageous price at some point ahead of expiration day. Options implied volatility on JNJ is up 13.00% at 17.06% as of 3:15 pm (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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