The healthcare products giant Johnson & Johnson (JNJ) is not a very exciting stock for traders, and is often used as what I like to call "defensive padding" due to the 3.6% dividend on the stock.
Although 3.6% is better than all those safe bonds out there, it is quite underwhelming. I think we can do a lot better than that with the help of covered calls (probably the most common options strategy traders use today)
That word is probably scary, particularly for those who are seeking the safest corners of the stock market (like JNJ), but the strategy that I will outline should add a relatively small amount of risk relative to the significant increase in gains one would see upon successful implementation.
The underlying idea has to do with the predictability of your JNJ shares, and the assumption that they will not experience any violent rallies after "waves" of good news. For instance, a recent wave of good news, which included an analyst upgrade from JP Morgan (JPM) to "overweight" on June 13th for the first time in four years, induced a rally to 52-week highs despite weakness in the broader market.
Even though there were some positive developments in their pharmaceutical division that will fundamentally help JNJ in coming years, the vast majority of the company's revenue is derived from non-pharma healthcare products and medical devices. The likelihood of JNJ shares retreating to $64/share or so seems very high if we see more weakness in the broader market, and I think the likelihood of us seeing new highs for the company is minimal.
Given the current bullish sentiment, I think there is a good opportunity to sell some call options on JNJ to stack on top of gains from the dividends.
In circled what I believe to be the most attractive call option to sell at the moment (a strike price of $67.50 that expires in 10 days). Assuming that the market was open right now and these prices were attainable, it'd represent an instant gain of $.52/share, with no possibility of trading losses other than declines in JNJ share price (which would have hurt you to begin with since we are assuming you own shares).
Yes, if JNJ shares made a new 52-week high above $68.32 you would lose money on an "opportunity cost" basis, you'd actually make money from the transaction. You still get to keep the premium despite being forced to sell the shares at $67.50, which is ultimately worth a gain of 1.2%.
Again, you must be thinking: why sell these options with Johnson & Johnson instead of a company that has somewhat interesting price action?
The answer: its a $186 billion dollar company that has very mild movements in stock price and financial data (from quarter to quarter). There are an innumerable number of sources that can tell you about the safety of the stock's dividend, it's ~61% payout ratio, and its low beta, but fewer suggest extra ways to benefit from JNJ's traits.
To put it bluntly, I think the only effective way we can scrape out more money from our JNJ holdings is to sell options that would place the company's share price within improbable territory given its history. The shares have not gone anywhere in a decade.
An extension of this strategy that increases the risk would be the selling of put options with strike prices in the upper 50's when JNJ approaches $60 or so. This ultimately could force you to buy more shares, but by historical context they would be at bargain prices anyway (plus, the dividend at $60 would be a solid 4%). If prices recover, you keep your original position and make money off the option premiums.
There are technical indicators that can help you pinpoint the sweet spots for implementing the options strategies, but overall I think that calls should be sold when JNJ is above ~$67/share and puts should be sold when JNJ is below ~$60.
Although it takes timing to implement, and a lot more work, I think JNJ shareholders can see returns closer to 12% per year rather than 3.6% if they implement this strategy every month. The ~12% estimate assumes that the options expire worthless in about 2/3 of 12 cases (1 each month), and that their premiums are about 1% of share value on average.
With the capacity to triple your returns on JNJ, I think covered calls are well worth it on a stock like this. You only risk not owning JNJ during periods where it is overpriced anyway. Do leave feedback in the comments section if you feel so inclined!