EOT Trade Alert – June 22, 2010

June 22, 2010

Trade Alert:

   Buy JNJ October $62.50 Calls at $1.05 or better

Company Background:

Johnson & Johnson (JNJ) is one of the largest and best run consumer products, pharmaceuticals, medical devices, and diagnostics companies in the world.

Short-Term Catalyst:

There’s a lot of uncertainty in the world and the markets right now.

We’re getting mixed signals from the economic data as well as the technicals.

Over the last two weeks, stocks have shown some strength.  But their attempts to rally have stalled out at technical resistance.

JNJ’s stock took a hit after a recall of their Children’s and Infants’ Tylenol in May.  As bad as a recall sounds, it’s really done more damage to the company’s image and stock price than it will financially.

It looks like the bad news has dealt too much damage to the stock price.  And we’re beginning to see JNJ bounce back.  I think we’ll see the rebound continue as the reality of the financial impact on the stock becomes clear.

On a technical basis, JNJ is rebounding from oversold levels.  JNJ is down about 9% from its April high.  But it could easily race back to retest the highs.

The implied volatility on JNJ fell below the historical volatility over the last few days.  It makes these options look undervalued to me.

Let’s grab these options on one the most stable U.S. companies while their cheap.

Trade Details:

Underlying Stock Symbol:	JNJ
Current Bid-Ask Price:	$0.91 – $0.97
Option “Buy Up To” Price:	$1.05
Break-Even On Stock At Expiration:	$63.55
Maximum Risk Per Contract:	$105

Exit Strategy:

JNJ is trading at $59.96 per share.  Resistance levels will be at $62.50 and again at $65.  Remember, we want this stock to move higher.  Support levels will be at $57.50 and $55.  Conservative investors should look to exit at the first support or resistance level.  Aggressive investors may want to hold for a bigger move.

Chart:

Category: EOT Trade Alert