Johnson & Johnson (NYSE: JNJ) shares are rising today even after the company announced on Friday evening that its Cordis subsidiary issued a world-wide recall for about 132,000 balloon catheters used to expand blood vessels. The company had determined that problems with the devices could potentially cause injury or death, though no deaths have been reported. JNJ says the recall will not have a significant financial affect on the company and investors seem to agree with this assessment, as the stock has been trading slightly higher this morning. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on JNJ.After hitting a one-year low of $59.72 in July, the stock hit a one-year high of $68.85 earlier this month. JNJ opened this morning at $62.66. So far today the stock has hit a low of $62.50 and a high of $63.05. As of 10:30, JNJ is trading at $62.85, up $0.39 (0.6%). The chart for JNJ looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $55 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 4.2% return in just three and a half months as long as JNJ is above $55 at April expiration. Johnson & Johnson would have to fall by more than 12% before we would start to lose money.
JNJ hasn't been below $59 at all in the past year and has shown support around $60. This trade could be risky if the company has more problems with other products it makes, but even if that happens, this position could be protected by support JNJ could find around $60, where the stock bottomed twice over the past year. Plus, JNJ is a historically strong defensive stock, so if we get the recession everyone is talking about, JNJ probably won't fall too far.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in JNJ.
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