Thursday, January 19, 2012

New Trade: Johnson and Johnson (JNJ) Naked Puts

Today in a taxable account with JNJ trading at just under 65 I entered into the following transaction:

01/19/2012    STO  4 JNJ Apr 21 2012 60 Puts @.77        294.89

JNJ is obviously a long term hold. It is a dividend aristocrat, dividend champion, blue chip, widow and orphan core holding. If put to us our yield on cost will be over 3.8% with a dividend increase expected shortly after. We could then write covered calls on the position. If the puts expire worthless we will earn 8.73% in 93 days on margin maintenance of $3377.60 which equates to 34.26% annual. Of course we could choose to roll the position, we'll just have to see how things shake out.

8 comments:

  1. I have a similar trade I initiated in December 2011.
    I used a similar logic to yours.

    What criteria do you consider when choosing the expiration date for your options writing?
    Thanks.
    Slipkid1850

    ReplyDelete
  2. Hey Slipkid

    I check the charts and try to write puts at or below the 52 week low. With a stock like JNJ I look at yield on cost. If it would get put to me and yield 4% I know it's gonna rise because this is a 3% or so yielder. I picked this expiration because that's the first expiration where it paid a decent premium for such a low risk trade.

    I also look at exit strategies. Some stocks roll better than others. Some are great for writing covered calls if put to me in addition for collecting the dividend.

    I hope I answered your question. I appreciate the comment! Good luck in your trading.

    BTW what was your trade? Chester

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  3. Thank you for the kind reply. Thanks also for the insight into your strategies. If I understand your answer properly, you don't have a fixed time element involved when choosing an expiration. However, do you have a limit as to how far into the future your trade will extend?
    I am happy to share my current open and recently expired contracts.
    1 put sold MMM 01/21/12 $75.00 Initiated 11/28/11. Premium $3.00
    1 put sold AGU 01/21/12 $70.00 Initiated 11/28/11. $3.70 *
    1 put sold AGU 01/21/12 $72.00 Initiated 11/28/11. $4.60 *
    2 put sold RY 11/21/12 $44.00 Initiated 11/28/11. $1.37 *
    2 put sold RY 04/21/12 $44.00 Initiated 12/14/11. $1.31 *
    2 put sold JNJ 04/21/12 $60.00 Initiated 12/14/11. $1.75
    2 put sold MMM 04/21/12 $75.00 Initiated 12/14/11. $3.47
    4 put sold RIMM04/21/12 $14.00 Initiated 01/13/12. $1.20
    5 put sold ECA 07/21/12 $14.00 Initiated 01/17/12. $0.70
    * indicates Montreal Stock Exchange/Canadian dollars.
    Thanks again for the kind words and the great blog. I will spread the word.
    Slipkid1850.

    ReplyDelete
  4. I like those trades and they seem to be proceeding well for you. We seem to have similar strategies. RIMM scares me though. Good luck.

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  5. I respect that assessment of RIMM and your suspicions may prove prescient. My thinking is as follows and I would be interested in your opinion should you care to share it. RIM's growth in the developing world, the value of its patents, a 70 million strong subscriber list and the uniqueness of the encryption device all indicate to me a company that has many options for the future. Some analysts value the above as high as $22.00 per share if the company were to be broken up. If I get put at $14.00, less the $1.20 premium, this is a stock I am willing to hold, sell some covered calls and wait until the problems are worked out. They have little debt, quite a bit of cash, and remain profitable.
    Anyone aggressively shorting this stock is in for a big surprise.
    Thanks again for your comments, for the great blog and take care.

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  6. RIMM cleaned house and the market liked it, huh?

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  7. Stocks in the healthcare area or food stocks do not seem to be the best type oompanies to use options. Stocks that have a high betas seem to me to make better gains.

    ReplyDelete