Put Selling on Johnson and Johnson Stock In May Shows Having Patience Pays Off

Put selling against equities to earn the best option premiums often requires patience as I discussed in an earlier article on Johnson and Johnson stock. To cap off the topic I want to take a quick look at my latest put selling on Johnson and Johnson stock which have taken place on May 23 and May 25 2012.

There are many signs that this recent weakness in Johnson and Johnson stock may be warning that there is more downside to the latest descent in JNJ Stock. This of course could create more put selling opportunities at either higher premiums or at lower strikes. If you recall earlier articles on Johnson and Johnson stock I mentioned how the $60 to $62.50 strike areas were prime put selling strikes based on the past 12 months of Johnson and Johnson stock. But to get further evidence as to why I continue put selling this level let’s look at the 5 year Johnson and Johnson stock chart.

Johnson and Johnson Stock 5 Year Chart

The five year chart takes into account the bear market of 2008 to 2009 in which the stock traded below $60.00. During this period the stock finally collapsed as all stocks did in the market crash and become very undervalued below $50.00.

When you look at the five year chart you can understand why I bought shares when Johnson and Johnson stock collapsed below $50 in that bear market. But there is something else of importance as well. You can see there is a lot of strength in this stock at the $60 strike and to a lesser extent the $62.50.

Put selling at the $60 strike makes sense because based on the 5 year chart below Johnson and Johnson stock rarely falls below it.

The $62.50 strike for put selling also makes sense because there is enough strength in the stock between $62.50 and $60.00 to keep the stock from falling much below $60.00 and recovering back to the $62.50 level. This means that put option premiums for a while should be better in the $62.50 put strike.

The 5 year chart gives a lot of confidence in put selling Johnson and Johnson stock.

Johnson and Johnson Stock 5 Year Chart Showing Optimum Put Selling Strikes

Johnson and Johnson Stock 5 Year Chart Showing Optimum Put Selling Range between $60 and $62.50 has lasted over 5 years.

Put Selling $62.50 Strike

You can understand from the above 5 year chart why I have taken to put selling the $62.50 strike and if the stock should fall much below the $62.50 I am interested in buying a few shares for what I believe will be a bounce back up in Johnson and Johnson stock.

Looking though the May 2012 Johnson and Johnson stock chart shows that this time JNJ Stock may fall further than the previous pullbacks the stock has experience this year.

Johnson and Johnson Stock Warnings Signals

This latest downturn in Johnson and Johnson stock started on May 4. On May 17 the technical indicators of Ultimate Oscillator, Fast Stochastic and Slow Stochastic gave the lowest oversold readings to date on Johnson and Johnson stock.

A few trading sessions later on May 23 I started put selling JNJ Stock. By Friday May 25 the stock was down an additional 1.9% since the May 17th oversold readings. While all the indicators still are not signalling that the May 17th oversold reading will be broken, there are some warning signs that Johnson and Johnson stock could fall further this time.

In the last run up from my April put selling trades, JNJ Stock made a lower high on May 3 which I have marked with the red arrow below. After May 3rd,  Johnson and Johnson stock turned back down creating the lower high. This warned me that JNJ Stock could move lower this time and I should hold off put selling until I saw whether or not it would fall lower than the April sell off in the stock.

Put Selling Johnson and Johnson Stock Chart For May 2012

Put Selling Johnson and Johnson Stock Chart For May 2012 shows the steady erosion of JNJ stock and lots of warning signs.

More Johnson and Johnson Stock Warnings

Another warning to watch for was that in the April rally back from the first lows, the stock rose two days and made a higher high than the previous low. But in the first rally from the selling, this month, Johnson and Johnson stock made a lower high after the first selling ended. This shows lack of conviction on the part of investors and signalled that the stock would probably move lower until buyers stepped in to halt the decline.

Johnson and Johnson Stock Shows April and May Declines

Johnson and Johnson Stock shows the April decline and the May decline. The May decline is worse and shows a number of technical breakdowns.

The next warning came when the lack of strength in the May rally failed to push the stock away from the previous rally low from April. Instead of moving higher, Johnson and Johnson stock in May stayed near the April low and indeed bounced off of it several times. This is another technical indicator that the stock will probably move lower.

Johnson and Johnson Stock May 2012 lows

The May 2012 rally attempt from the first sell off in Johnson and Johnson stock did not result in a solid move up.

May 23 Put Selling On Johnson and Johnson Stock

I therefore took the advice of the technical timing tools and did no put selling until finally on May 23 I sold my first set of naked puts on Johnson and Johnson stock, selling the June $62.50 for .68 cents. The key here though was that unlike the April rally, this month the technicals are poor and I can almost guarantee that Johnson and Johnson stock will move lower. I therefore sold just 5 naked puts on May 23. This means of the 25 naked put options contracts I am interested in selling, I still have 20 put selling contracts I can sell in the future.

Put Selling Johnson and Johnson stock on May 23 2012

My first put selling trade on May 23 in Johnson and Johnson stock

May 25 Put Selling On Johnson and Johnson Stock

On May 24 Johnson and Johnson stock continued falling but the ultimate oscillator, fast stochastic and slow stochastic all showed that the worst oversold readings remained on May 17. I felt another day would not hurt in my put selling and indeed on Friday May 25 Johnson and Johnson stock fell more.

Put options premiums were high and I sold 5 naked puts into July at the $60 strike for .65 cents and I sold 5 naked puts for July at $62.50 for $1.35. This still leaves 10 put options contracts that can be sold should Johnson and Johnson Stock fall lower.

This strategy of patience when doing put selling has been very good rewards so far. I have stayed with small groups of 5 naked puts each and have earned some decent put options premiums by waiting.

Put Selling Johnson and Johnson stock May 25 2012

By May 25 put premiums were high as Johnson and Johnson stock fell below $62.50 making put selling attractive.

You can review my May 23 and May 25 naked puts trades in the 2012 Trade Chart for Johnson and Johnson stock.

Put Selling And Patience

Having patience, particularly during market corrections can work well. However by looking out 5 years I know that the $60 level in Johnson and Johnson stock has a very good chance of not being broken. This gives me the confidence to keep put selling as the stock pulls back. Should it continue to decline to $60, I will be doing more put selling, but based on the market timing technicals and the 5 year chart I would think Johnson and Johnson stock will not fall much beyond here.

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  • Anonymous

    What rate of return do you try to achieve? Even with current pricing of $.73, the $62.50 puts are returning only 1.1% monthly.

    Thank you.