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Michael Haden's Insights

Options Analyst Writer
Michael Haden
Author Bio

April 20, 2015 - Johnson & Johnson - Healthy Profits

Healthcare has proven to be a solid performing sector for investors for some time now, providing solid returns as other areas have disappointed. Big Pharma companies with a diverse range of products can produce a steady cash flow year in and year out.

As we roll into earnings season, investors can look forward to receiving data on just how well various players in the sector are performing. One pharmaceutical company in particular has enjoyed a string of earnings wins that stands out in a field of strong performers. Johnson & Johnson benefits from its status as a leading player in the pharma industry, as well as the profits from its personal health care products.

On Tuesday, JNJ reported first quarter net earnings of $4.3 billion. Domestic sales increased 9.1% while international sales increased 3.0%. With new products delivering strong underlying growth, Johnson & Johnson is poised to benefit from an aging population that will   drive future expansion. As a further benefit to investors, JNJ has managed to deliver a dividend increase for 25 straight years.

In order to capitalize on the consistent performance of JNJ stock, we will look for a covered call that will allow us to reap the benefits from this solid stock along with the additional premium gained from selling a call against that stock. Our sold call premium will also provide some cushion in case the stock should take a downward turn. JNJ serves as a stable underlying stock with the type of consistent performance that we will require for a covered call, while it is unlikely to surge suddenly in such a way that our shares would be called away. While we would expect the stock to continue to rise steadily, we should be aware of the possibility that we may have to sell the shares at the strike price of our call.


Charts courtesy of 

To open our trade, we will buy 100 shares of JNJ stock trading at $100.02. At the same time, we will sell a July?15 $105 call against those shares for about $0.78 per share. We pay $10,002 for our 100 shares of JNJ while we receive $78 for the call option. That gives us a total investment of $9,924.00, or $99.24 per share. Our target return for this trade is 5.8% over 92 days. To cause a problem for us, JNJ stock will have to drop by 0.8%.  

Let?s look at the possible outcomes of our trade:

If, when we reach expiration, JNJ is above the strike price of $105.00, the call will be assigned and we will sell the shares at $105.00, which is slightly more than we paid initially. Since we received that $0.78 per share credit up front, our actual cost basis is $99.24, which means selling at $105.00 gives us a profit of $5.76 per share.

If, at expiration, the price of JNJ stock is below $105.00, our sold call will expire worthless and we will get to keep both the original credit we got for selling it and our underlying shares. At that point we can sell another call if we like and continue to enjoy the profits.

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