In a recent article posted on February 19, 2012, related to Johnson & Johnson (NYSE:JNJ), a bull-put credit spread was considered for the company. The bullish position was considered in spite of bad news swirling around the company, as bad news doesn't appear to stick to the company. Bad news continues to swirl around the company, as Pfizer (NYSE:PFE) is suing a business unit of Johnson & Johnson related to a patent for pain-relieving heat-patch technology. Additionally, another business unit, DePuy, is in the news related to knowledge of the FDA not approving a hip prosthesis one year prior to the company recalling the device. And, Synthes, a company Johnson & Johnson is in the process of acquiring, is being threatened with penalties if the company does not correct a number of quality control associated with is plant located in Pennsylvania.
Johnson & Johnson's stock price is down somewhat over the last few days, but not too dramatically as shown below:
The bull-put credit spread mentioned in the previous article hasn't breached the management point of 63.75, but a large portion of the 5% potential profit has been realized, leaving about 1% left yet to be realized, so rolling the position to realize additional return is considered.
Using PowerOptions tools, it can be observed that a net debit of $0.05 is required to exit the current position and there aren't any attractive March positions, so rolling to April is considered with positions for April shown below:
Rolling to the same strike prices for April is available with a potential return of 9.4%, however this position does not have very much margin between the stock price and the strike price of the short put option. The 2012 April 55/60 put spread is available for a net credit of $0.17 and a potential return of $3.5% which isn't great, but it's not too bad. However, only 2.5% of the new position is available as potential return, as 1% of potential return is required for closing the existing position. And, even a potential return of 2.5% isn't too bad when considering the potential annualized return is 20.3%.
Based on this, the position is rolled to the 2012 April 55/60 put spread for a total net credit of $0.12 ($0.17-$0.05). The $0.12 net credit is kind of slim, so an investor should make sure the potential profit is not swamped by brokerage fees/commissions. If brokerage fee/commissions are an issue, then the position can simply be closed for a 4% profit. A profit/loss graph for the new position, including consideration for the initial position is shown below:
The management point for the new position is set for $62. If the price of the stock drops below $62, then managing the position for an exit or a roll should be considered.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.