arrow-left arrow-right brightness-2 chevron-left chevron-right circle-half-full facebook-box facebook loader magnify menu-down rss-box star twitter-box twitter white-balance-sunny window-close
Using a call spread like a buy-write in Johnson & Johnson (JNJ)
2 min read

Using a call spread like a buy-write in Johnson & Johnson (JNJ)

We look at how to create a stock / buy-write alternative targeting that area with a Sept timeframe, using a simple 2 strike call spread.
Using a call spread like a buy-write in Johnson & Johnson (JNJ)

  • Johnson & Johnson (JNJ) is in the mix for producing an eventual vaccine for Covid-19, and is ramping up production capacity.
  • The stock is down from its April highs around $155, now trading ~$144.
  • We look at how to create a stock / buy-write alternative targeting that area with a Sept timeframe, using a simple 2 strike call spread.

The Set-Up

JNJ hit a Feb high near $153, a March low around $111, a new high in April around $155 and now sits ~$144. Here's the 3 month expected move chart, via Options AI technology:

The 3 month chart has a bullish expected move about in line with the April high. That's a good area to target for those looking to go long. We'll look at a simple way to define risk to a target and create a stock like alternative with a September time-frame. This example is in JNJ but can apply to any stock where someone is looking to go long without a ton of extrinsic premium risk.

Ways to Play

What we're going to focus on is the breakeven of a call spread. Let's start with a +145/-155 call spread, slightly out of the money, then we'll lower the long strike until we create a breakeven close to where the current stock price is, via OptionsAI technology:

  • The Sept +145/-155 call spread costs 3.23, for a breakeven of 148.23 in the stock, just a 38% probability of profit.
  • If we lower the long strike to +140/-155 call spread, the cost goes higher to 6.11, creating a lower breakeven of 146.11 and a higher 45% probability of profit.
  • And finally, lowering the long strike to +135/-155 costs 9.61 and gets the breakeven to 144.61 (about where the stock is trading) and is reflected by a near 50% probability of profit.

Each trade has its pros and cons. Mainly cost versus probability. I wanted to highlight the +135/-155 though because once you get the long call deeper in the money, it starts acting less like a call spread and more like a synthetic buy-write, but with defined risk, at for a lot less cost than buying the stock and selling the 155 call.

This trade is not 100 deltas so it will not act like stock 1 to 1 so the more apt comparison in the time between now and September is that of a buy-write. But like a buy-write it will act like stock at expiration up to the 155 level, but at a fraction of the cost.

Previously:

Actionable Insights from the Options Market

Earnings event expected moves
Unusual activity alerts
Spread trade education

Broker Dealer (FINRA Registered)

Built for one-tap spread trading
No chains. No per contract fees.
Powered by OptionsAI technology (Patent Pending)