$914 profit in JNJ
Happy weekend! This week, my long-running JNJ saga has finally come to a close. It took about 4 and a half months, but it's finally done with $914 in realised profits ($1,033 if you include dividends). So this week I will focus exclusively on this trade - how it started, how it got into “trouble”, and how I got out of it with a profit.
$914 profit in JNJ
On 24 January JNJ's stock price dropped from about $175 to $168. This past Friday, on 16 June, JNJ closed at $164.25. Anyone who entered a position in JNJ on 24 January would be down $10.75, or about 6%. If you've been following this newsletter for a while, you'll know that entering a JNJ position on 24 January is exactly what I did, but I just got out on Friday with a realised profit of $914, or about 6% profit. So that's a 12 percentage point difference between buying stock and using options - let's talk about how that happened.
On 24 January I sold a cash-secured put at the 160 strike expiring Feb 24 for $92 in premium. What that means is I'm promising to buy 100 shares of JNJ at $160 (for a total of $16,000) if the stock price is lower than $160 come Feb 24. It might be hard to see from the chart above, but on Feb 24, JNJ was trading at about $156, which means I'm on the hook to buy 100 shares. The first line of defence is rolling this position out in time, and I rolled the trade out to Mar 31 for an additional $141 in premium. So now if JNJ was below $160 on Mar 31, I still need to make good on my promise to buy 100 shares, but now I've collected $233 in premium on the way to offset my purchase. Eventually, I did get assigned those 100 shares at $160, which meant I had to turn around to try to get out of the trade. Note: you don't have to, you can just keep the shares and collect the dividend - but since this was a real trade put on for my course, I wanted to demonstrate how we could get out of a bad trade and still make money)
This would be the start of another 3 months of selling covered calls and covered strangles against the 100 shares in an attempt to get out of the trade just using options, as you can see in the screenshot above. At one point I had collected over $600 in premium and could have just sold the shares outright and walked away with a profit - but again, the whole point was to teach and demonstrate how to do it with options. As of last Friday, the final trade was a $150/$160 covered strangle, which expired worthless. Which meant I kept all of the $914 of premium collected along the way and got out of the trade, even though JNJ is still trading well below where it was on Jan 24. On top of that, I also received a dividend of $1.19 per share, which added on top of the $914 brings a total profit of $1,033. Early assignment of 100 shares is one of the biggest fears for someone beginning to trade options for the first time. First you're forced to buy 100 shares of something at $160, then the price drops all the way to $150 - it's scary! But as long as you chose the right stock to begin with, and stick to the strategy of continuing to lower your cost basis to get out of the trade, more often than not you will get out with a profit - it may just take some time (in this case, just over 4 months) I've been sharing updates in the JNJ position regularly since getting assigned the shares earlier in the year, click on the link below for more info on how I handled it at each stage.
But wait, I hear you say - what if now JNJ is going on a massive rally and will shoot up to $250? Won't I be missing out on all those gains by exiting the position now? Well guess what, in parallel to this trade I entered another trade in my long-term portfolio, and also picked up 100 shares there. So those shares will enjoy the dividends and capital appreciation over time, and at the same time this $914 will go into reducing the average price of those shares. That's why using options to complement a long term buy and hold strategy can be so powerful, because it's the best of both worlds.
That's it for this week, I know some of the above might be gibberish to people who have never traded options before - but I also hope it helps to demonstrate the power and flexibility of options, and to illustrate that it's not just gambling on prices moving up or down.
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This article is for educational purposes only. This is my own portfolio which is being managed according to my goals and risk tolerance. Your situation is likely different and you should do your own due diligence before investing in stocks or options.