JNJ Option Traders Aim to Continue Positive Trend

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JNJ Option Traders Aim to Continue Positive Trend

Following the announcement that Johnson & Johnson (JNJ) surpassed earnings projections for the fiscal second quarter, option purchasers are taking measures that indicate they believe the stock price will climb in the future. JNJ reported adjusted earnings per share (EPS) of $2.48 and sales of $23.31 billion, compared to analysts’ forecasts of $2.21 and $22.21 billion, respectively. This may come as a surprise given that JNJ’s stock price climbed by less than 1% the day after the report was released. Prior to results, investors bought up JNJ share prices, with a large amount of put options sold in open interest.

Option trading volumes revealed that traders were buying calls and selling puts, and options activity after results suggests that traders are bullish about JNJ shares heading higher in the future. This is because the price movement has tested resistance, but option activity indicates that traders are still buying calls and selling puts.

A comparison of stock price movement and option trading activity on the days after results offers some indication that option traders may be cautiously hopeful. Even though JNJ’s share price climbed less than 1% following results, the purchasing pushed prices over the company’s 20-day moving average. Furthermore, put option activity has decreased while call option activity has surged. This is possible because options traders predict JNJ will continue to rise beyond pre-earnings pricing.

Key Takeaways

  • JNJ outperformed estimates on both profits per share and sales.
  • Following the results report, traders and investors continued to buy JNJ stock, which increased less than 1%.
  • Following the results release, JNJ’s stock price surged above its 20-day moving average.
  • Despite the surge in share price, put and call option activity looks to be positioned for a decline.
  • Support and resistance levels based on volatility allow for a little greater movement downward than upward.
  • This strategy allows traders to benefit from a reversal in the earnings-based share price gain.

Option trading may reflect the activities of investors who want to hedge their long holdings or speculators who want to earn by accurately anticipating unanticipated change in an underlying stock or index. Options trading is essentially a gamble on the market’s probability, made by traders who are, on average, more educated than other investors. Understanding the environment in which the share price behavior occurred is critical to capitalizing on this information. The chart below displays JNJ’s share price activity on Thursday, July 22, indicating the setup after the earnings release.

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Current Trends

Over the duration of the one-month trend, the stock’s share price has maintained in the higher section of the medium range. JNJ soared to more than $170 per share towards mid-July, then fell as results neared, before eventually rising less than 1% on the day of the release and less than 1% the next day. The price settled at the top zone shown by the technical studies on this chart.

The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array serves to demonstrate how the price has fluctuated but largely stayed in the average.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

Chartists may see that traders were anticipating an upward advance leading up to results since JNJ’s share price was heading above its 20-day moving average. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, it looked that traders expected JNJ to rise somewhat following results.

Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

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Trading Activity

Option traders’ recent activity suggests that they believe JNJ shares are cheap and have acquired call options in the hope that the company would close inside the box illustrated in the chart between now and Aug. 20, the next monthly expiry date for options. The price offered by put option sellers is shown by the green-framed box. It means that there is a 69% likelihood that JNJ shares will finish inside this range or higher by August 20. As a result, sellers are just modestly optimistic. Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing predicts just a 31% possibility that prices would fall below the green box, it seems that purchasers are ready to risk the long odds.

It is worth noting that open interest on Thursday included about 239,000 call options vs around 185,000 put options, illustrating the bias that option purchasers had, since there were more calls than puts. This quantity often indicates that option traders are dubious about their future expectations for the share price.

The volatility has lessened considerably after results, although the number of call options in open interest remains bigger than the number of puts. This indicates that put options are being sold rather than purchased, resulting in a positive attitude. The put volume outnumbers the call volume for strikes at the money and several steps either way. Out-of-the-money call option volume drops at a considerably slower pace than out-of-the-money put option volume, indicating that more traders expect JNJ share prices will rise rather than fall, closer to its 20-day moving average.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months.

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The levels marked by the turns are noted in the chart below. What stands out in this chart is how close the call and put prices are, with more room to go lower than higher. This shows that option purchasers may not be certain about how the company’s stock will perform in the weeks following the report. Despite the fact that investors and option traders anticipated upward movement after the report, the share price moved a lesser distance than it did following the last earnings announcement.

These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, a significant shift in either way is probable in the near future. JNJ shares climbed 2.3% the day after the last results report, but declined the following week. Investors may not anticipate the same level of price drop in the week after this statement. With plenty of space in the volatility range, share prices may increase or fall more than anticipated in the short term; nevertheless, there is more room in the volatility range to support a downward trend.

Wrapping Up

Johnson & Johnson exceeded analysts’ earnings per share and sales forecasts. As a consequence, investors showed their faith in the firm by purchasing shares, putting the share price above its 20-day moving average. Bullish attitude seems to be shown by option traders who appear to be purchasing calls and selling puts. This activity, however, creates additional space in the volatility range for a future decline in the share price.

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