JNJ Option Traders Ready for Positive Earnings

In anticipation of Johnson & Johnson’s (JNJ) release of its quarterly results, bullish investors have begun to buy up share prices. A stock’s future course cannot be precisely predicted in advance of an earnings report. However, a comparison of the price movements of stock prices and option prices reveals that downside-focused traders would earn the most if JNJ shares decline, causing a reversion back to its 20-day moving average in the first few days after the news.

There is still a sizable group of put options in the open interest for JNJ, and they seem to have been started as sell orders. Trading volumes suggest that traders have been hedging against a negative earnings announcement by purchasing calls and selling options. These wagers might quickly lose their value if JNJ shocks the market with a disappointing statement, which would put downward pressure on the stock price.

It is quite impossible to forecast with any degree of accuracy which way a stock will move after an earnings announcement. However, a comparison of option trading activity and stock prices reveals that, in the event that the business reports poor profits, Johnson & Johnson shares might decline sharply, departing from their 20-day moving average in the immediate aftermath of the release. Options are priced anticipating an upward movement, so this might occur, but unexpectedly bad news could take traders off guard and cause a sharp decrease in price.

Key Takeaways

• In advance of the announcement, traders and investors have started to push Johnson & Johnson’s share price upward.
• Recently, the share price of Johnson & Johnson dipped near and then rose from its 20-day moving average.
• Call options are priced for a higher gain while put options are priced for a lesser decrease.
• The resistance and support levels depending on volatility are set up to go either way.
• If the price declines, there is a better chance for traders to make money with this scenario.

Investing in options is a way for investors to safeguard their holdings or for speculators to make money by accurately predicting unforeseen changes in an underlying stock or index. As a result, trading options is essentially a wager on market possibilities. Chart watchers may learn a lot by analyzing the specifics of stock and option price behavior, but it also helps to understand the environment in which these price actions occurred. The price movement of JNJ’s shares and the preparation for the earnings release are shown in the chart below.

Current Trends

JNJ’s stock has been going upward over the last month, rebounding off of a bottom support level as the announcement date approaches. In July, the stock price of JNJ increased significantly above its 20-day moving average. As seen on this chart, the price increased from the lower end of the trading range up above the 20-day EMA.

The studies’ 20-day Keltner Channel indicators are created. These are price levels that are multiples of the stock’s average true range (ATR). This array makes it easier to see how the price changed from being close to the middle range’s bottom to the higher boundaries. The price movement for Johnson & Johnson shares is encouraging.

Tip

A common method for displaying historical volatility over time is the Average True Range (ATR). Two to four weeks of trade on a daily chart are often included in the 10 to 20 time periods that make up the standard average length of time utilized in its computation.

Chart watchers may see that traders and investors are exhibiting confidence coming into results in this situation when Johnson & Johnson’s price trend climbed upward over the prior month. Because of this, it’s critical for chart observers to ascertain if the move foretells investors’ hopes for a positive earnings report. The comparison of the volatility range shown on the chart by the purple lines and the purple box in the backdrop may be used as one piece of evidence to support the concept that investors are anticipating positive news from the corporate report. Although prices have made positive moves, they are still some distance from the range’s peak.

Tip

A 20-day simple moving average, an upper and lower line, and a series of semi-parallel lines are shown by the Keltner Channel indicator. This channel indicator provides for a fantastic visualization tool for charting historical volatility since the higher lines are produced by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price.

Trading Activity

The stock of Johnson & Johnson is now heading upward, and option traders have priced their contracts as a wager that, between now and July 23, the Friday after the publication of the earnings report, the stock will close inside one of the two boxes shown on the chart. The price that call option sellers are providing is shown in the green-framed box. If prices climb further, it suggests that there is a 67% likelihood that JNJ shares will finish inside this range by the end of the week. Put option pricing is shown in the red box, with a 36% chance of occurring if prices decline after the release of the earnings report.

The fact that there were more than 220,000 call options and just over 170,000 put options in the open interest for JNJ highlights the ambivalence of option purchasers. According to the chart below, option traders are not anticipating a substantial shift in either direction given that call options are just marginally more represented than put options.

The 10-day Keltner Channel research with a four-times ATR setting produced the purple lines on the graph. With this metric, the price action is more likely to produce zones of strong support and resistance that are strongly connected. When the channel lines have recently made a considerable turn, these areas become visible.

The graphic below includes annotations for the levels that the turns designate. The close proximity of the call option and put option prices in this graph, together with the ample room for movement on either side, is noteworthy. This shows that those who are purchasing options may not be fully confident in the company’s financial reporting. A startling news might cause prices to move sharply either way.

These levels of support and resistance indicate more support for prices if they were to start falling and lower resistance for prices if they were to start rising. Therefore, it’s likely that unfavorable news may come as a surprise to investors and lead to an unanticipatedly big reaction. Analysts who have found solid grounds to anticipate a positive report may be to blame for the sharp rise in price. Johnson & Johnson shares increased by less than 1% in the days after the last earnings report. If investors’ expectations are not met, a considerably larger downward swing may occur.

Market Impact

Because of Johnson & Johnson’s vital ties to the healthcare industry, their earnings announcement has a significant impact on the market. After results, JNJ shares normally fluctuate little, so the outcome doesn’t immediately affect index prices.

No matter what the study concludes, healthcare stocks are expected to see a substantial decline. The impact of the COVID-19 vaccine’s continuous deployment on the stock’s bottom line will be a crucial aspect to monitor. Other sector companies like Pfizer Inc. (PFE), Eli Lilly and Company (LLY), or AbbVie Inc. might benefit from a favorable report (ABBV).Exchange-traded funds (ETFs) like State Street’s Health Care Sector Index ETF (XLV) and perhaps State Street’s S&P 500 Index ETF would also be impacted (SPY).

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