JNJ Option Traders Ready for Positive Earnings

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JNJ Option Traders Ready for Positive Earnings

Optimistic investors have begun to buy up Johnson & Johnson (JNJ) share prices ahead of the company’s quarterly results report. There is no way to foresee the direction of a stock following an earnings report. A comparison of the price movement of stock prices and option prices, on the other hand, suggests that if JNJ shares fall, causing a reversion back to its 20-day moving average in the first few days following the announcement, downside-focused traders will be in the greatest position to benefit.

A notable number of put options remain in JNJ’s open interest and look to be begun as sell orders. Traders have been selling options and buying calls in expectation of a favorable earnings announcement, according to trading volumes. If JNJ surprises with a bad statement, these bets may quickly unwind, putting downward pressure on JNJ’s price.

It is incredibly difficult to anticipate the direction of a stock following an earnings release. However, comparing the price action of option trading activity and stock prices reveals that if the business reports bad profits, Johnson & Johnson shares might fall dramatically, departing from its 20-day moving average in the first few days following the release. This might occur when options are priced assuming an upward increase, but unexpected bad news could take traders off guard and cause a sharp drop in price.

Key Takeaways

  • Traders and investors have began to bid up the price of Johnson & Johnson’s stock ahead of the announcement.
  • Johnson & Johnson’s stock recently dipped to, then rallied back from, its 20-day moving average.
  • Put options are priced for a lower loss, while call options are priced for a higher gain.
  • Volatility-based resistance and support levels are set to shift in either way.
  • This arrangement gives traders a better chance of profiting if the price decreases.

Investors who wish to safeguard their holdings or speculators who seek to benefit from accurately projecting unexpected swings in an underlying stock or index engage in option trading. That is, option trading is a wager on market probabilities. Chart watchers may acquire useful information by analyzing the intricacies of both stock and option price behavior, but it’s also essential to understand the context in which this price behavior occurred. The chart below displays JNJ’s share price activity and the setup building up to the earnings announcement.

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Current Trends

As the announcement approaches, JNJ’s stock is rebounding off a bottom support level and heading upward, with the share price rising far above its 20-day moving average in the month of July. As demonstrated on this chart, the price rose from the lower end of the trading range to above the 20-day exponential moving average (EMA).

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 emphasizes how the price has shifted from the bottom of the middle range to the higher boundaries. This is a bullish price movement for Johnson & Johnson stock.

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.

In this context, where the price trend for Johnson & Johnson climbed upward during the preceding month, chart viewers may see that traders and investors are optimistic about results. As a result, chartists must analyze if the move is anticipating investors’ expectations for a positive earnings report. The contrast of the volatility range indicated on the chart by the purple lines and the purple box in the backdrop provides evidence that investors are anticipating positive news from the corporate report. Prices have risen, although they are still far from the top of this range.

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 have priced their options to wager that Johnson & Johnson shares will close inside one of the two boxes illustrated in the chart between now and July 23, the Friday after the earnings report is announced. The price offered by call option sellers is shown by the green-framed box. If prices continue to climb, there is a 67% probability that JNJ shares will finish inside this range at the end of the week. The red box reflects the pricing for put options with a 36% chance of being exercised if prices fall after the earnings report release.

It is worth noting that the open interest for JNJ included almost 220,000 call options and approximately 170,000 put options, illustrating option purchasers’ reluctance. Given that call options are just slightly more prevalent than put options, option traders do not anticipate a large shift in either direction, as illustrated in the chart below.

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.

The levels marked by the turns are noted in the chart below. It is interesting in this chart that the call option and put option prices are so close, with lots of room to run on either side. This shows that option purchasers aren’t certain about how the firm will report. A surprise report may send prices soaring in either way.

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These support and resistance levels indicate greater price support if prices begin to fall and less price resistance if prices begin to increase. As a consequence, investors may be caught off guard by adverse news, resulting in an unusually big move. Analysts who have uncovered excellent grounds to predict a positive report may be driving the quick rise in pricing. Johnson & Johnson shares climbed less than 1% in the days after the prior results report. If investors’ expectations are not met, a far larger downward move might occur.

Market Impact

Because of the company’s crucial tie to the healthcare industry, the impact of Johnson & Johnson’s earnings report is significant to the market. JNJ shares generally change very little following results, therefore the outcome has no direct impact on index prices.

Regardless of what the study says, it is expected to have a substantial influence on healthcare stocks. The impact of the continuing COVID-19 vaccine deployment on the stock’s bottom line will be an important element to monitor. A strong report might boost the shares of rival pharmaceutical companies such as Pfizer Inc. (PFE), Eli Lilly and Company (LLY), or AbbVie Inc. (ABBV).It would also have an impact on exchange-traded funds (ETFs) like State Street’s Health Care Sector Index ETF (XLV) and maybe State Street’s S&P 500 Index ETF (SPY).

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