Interesting day we're having Bill. I was looking at this all morning. What worries me is there could be a few dollars of downside left with a dead cat bounce to follow. The loss of the Guidant acquisition is a blow too large to ignore. It's growth is seriously hampered. I know your eye for value is outstanding however, the market is in bull mode for growth stories. Sounds like a case of Kinetic Concepts another medical device maker who is struggling with reimbursment issues and smaller rivals stealing its VAC wound share.

It's a hard call on JNJ. I'm going to pretend I want it while I walk away showing no interest. If it dips another dollar I'd take a position. If not I have one too many names with 80% plus quarterly earnings growth to chase instead.

This market is rewarding those that buy high and sell higher - Case in point = Gold/Silver/Oil

You may get a dead cat bounce but no bowing down to those!

/d

dinov-

If I read Bill's post correctly, he is recommending writing puts to accumulate JNJ at prices under $55 for the long term trader. So what is this about dead cat bounces? He didn't say he was looking for bounce here. Implied in his post is that he would like it to decline and get put to him where his projected 5Q return is ($70-54.50)/54.50 plus dividend or approxinmately 30%. For most long term traders, that's a win. Bill gets a bow in my book for pointing out the possbility. You don't find such "market advice" on the vast majority of blogs and I suspect that is why people are here.

Bill,
Most of your material I agree with but your logic with options I believe is flawed. First of all the 55 puts are too cheap to sell. The volatility is too low. If you think the stock is cheap buy it but by selling puts it has to close below the strike and you may miss it. And then if you think the 50 puts would be in play then the 55 puts would be sold and probably lead to a loss. At these low volatility levels most pros would buy the 50 and 55 puts in ratios and buy the stock and the stock could be scalped back and forth around a delta neutral position. If you want some income sell the 60 calls.

kc-

Thanks for pointing out another approach/method. Since some of us in here are not pros, could you explain "scalping back and forth around a delta neutral position"? Is this more or less conservative/long term than Bill's use of options?

MarkM - I know exactly what Bill was talking about but I like to keep it simple for those that do not like using options. I was talking strictly about purchasing the stock outright. You don't assume that everybody is comfortable with options do you? There are a variety of readers on this blog and if you read over my post again you'll get what I'm talking about. I was warning those to ignore a possible short term dead cat bounce in JNJ if it does occur.

/d

JNJ starting strongly this morning. Amgen up 6% and the whole AMEX Drug Index is up. JNJ and Wyeth leading sector. Johnson looking good this morning trying to get out of its oversold condition. Traders looking to scalp or value funds stepping in. Presently, its hard to make the call which scenario it is as its probably a combination scenario.

Sentiment from Sector: Positive (many positive articles out this morning on drug sector upon market open)

/d

d/-

Okay. Appreciate your posts. I always find them interesting. You are correct that options aren't for everyone. I may have misunderstood your dead cat bounce reference.

M

MarkM,

Say for simplicity JNJ is trading 55 and we purchase 10 55 puts. This wouild mean we have a short position of an equivalent stock position of 500 shares or short 500 deltas. Therefore you would buy 500 shares to stay delta neutral. Now lets say the stock drops to 50. The 55 puts would now have a negative deltas close to one. Your overall position would now be -500 deltas. The puts would have close to -1000 deltas and the stock would be +500 (the original 500 shares we purchased). So now we would purchase another 500 shares to stay delta neutral. Finally the stock rallies back to 55 and the puts only have a negative delta of 500 against the 1000 shares in total we have purchased so we can sell out the additional 500 shares we purchased. This is a simplified example of what scalping against your position means. The traders call it a backspread or synthetic straddle. kc

kc-

If you don't mind a little teaching moment, could you explain the circumstances under which you would employ such a strategy? What would your thinking be?

MarkM,

Basically the market makers keep a close watch on volatility. For example based on implied volatilities(prices observed on screen))of options in JNJ your BlackScholes model computes JNJ options are trading at 25 volatility. This is an annual volatility. Now like any other security, market makers are looking for mispriced options. Your model computes the puts are worth 1.0.at 25 volatility. Because many people in the public like to pick up income they sell these options. The market in the pits might be .75-.85. They (MM) will buy at .75 and sell at .85. The only reason there is a .85 offer when your model says they are worth a 1.0 is because there are sellers and you know you can buy them for .75. Now if you can buy them at .75 and they are worth 1.0 and say you buy 100 of them on average you will make $2500 ( 100*25). This assumes the volatility stays approximately the same. You would employ a long premium (buying puts and calls) position when volatilities are low as they have been over the past year. And when volatilities are high you do the exact opposite which is called a short premium position (sell puts and calls). The goal of most traders is to constantly buy and sell mispriced options picking off a nickel here a dime here and spreading off staying as flat as possible. I hope this helps and if you have any other option questions feel free to ask. kc