March 18 2011 /
Stock - Johnson and Johnson - Stock Symbol JNJ
Recent Weakness Shows The Value Of A Plan
JNJ STOCK - The Value Of A Plan
If you look at the chart below you can
see the breakdown in Johnson and
Johnson. At the start of the year I had
$93,500.00 invested in naked puts on
Johnson and Johnson and a total income
of $12217.25. With the stock pullback
many of my deeper naked puts at the
$65.00 and $62.50 level are in the
It is important to
remember the overall plan. Eventually I
want to be assigned shares, but there is
no need to accept assignment at this
stage as there is still a lot more
income to be earned. That was the plan
back in Feb 2009 - to secure shares in
JNJ but using as much as possible, other
people's money. Because of the plan it
is easy to make a decision to keep
rolling my puts.
Stocks move around a lot more than people realize, just look at my
second chart below. JNJ has had a string of bad news, but this is a mammoth company with enormous earnings and steady growth. There is no need to fear this downturn. In fact JNJ was at $57.50 in the summer of 2010.
The objective here is to reduce the number of naked put contracts to free up capital in order to take advantage of the stock's downturn. How best to do this? Here is what I have put in place. Starting with Feb 18th expiry, I began to reduce the number of naked puts and rolled out further in time. As of March options expiry, I have just $62,000 in naked puts and I have increased my income to 13,231.00 despite the buybacks, roll outs and reduction in capital and naked puts. I have gone from 15 naked puts to 10 naked puts and they are now in groups of 2 and spread out across the year. This leaves me with capital available to sell more naked puts at lower strikes as opportunities present themselves.
At 10 naked puts and 62,000 in capital, if I was assigned on all naked put contracts my cost would be 62.00 a share. If I deduct the income earned to date my cost is reduced to 48,769.00 which makes a cost basis of $48.77 per share. This is a great entry level on JNJ, but I would still prefer more income, so I will continue to roll my puts and when opportunities present themselves, sell additional puts. In two years I have earned about 13,000.00. If I can repeat this over the next two years I will have earned 26,000.00 and then I may consider picking up some shares in JNJ. I believe it is important to only sell naked puts on stock that I would own if assigned. That way it is easy to put in place a plan, execute that plan and stick with the strategy
The second chart shows JNJ from the Credit Crisis. Look at how often it has hung around the $57.50 valuation. There is a lot of support at that level. JNJ is a huge company with strong profits. Remember that stocks move around a lot and it can be seen in this chart. Should JNJ fall back to the $57.50 level or lower I will sell puts at the $57.50 to $55.00 strike levels. I have marked on the above chart the low of Mar 9 2009 when JNJ fell to $46.25. This gives a lot of comfort for if this was the low during the worst financial crisis since the Great Depression, then I believe I am working with a strong corporate stock and I do not need to be concerned on a pullback but instead can approach it as an opportunity.