Surge in put-buying indicates drop by the month’s end.
On Tuesday, over 4,700 contracts traded on an August 30th $123 put option on Johnson & Johnson (JNJ). The bet, with shares of the healthcare giant trading around $131, implies a 7 percent drop by the end of next week.
The option, with a prior open interest of around 150, saw volume increase by 32-fold as a result of the surge in trading.
The company could certainly see shares drop that quickly. In the past year, a number of claims have been made against the company and its myriad of products, leading to high-publicity lawsuits. One of the most recent claims was that the company’s talcum baby powder was responsible for a rise in cancers.
Action to take: With a 52-week low of shares around $121, this option looks like an interesting bet—especially as a way to hedge against the market. However, we would prefer to go out a few months for the trade to play out, as the $0.50, or $50 per contract on the August 30th puts could quickly evaporate.
A January 2020 $125 put option, while more expensive at around $440 per contract, could give investors a nice hedge against a market decline in the latter half of the year.
At current prices, and with the big lawsuits hanging over the company, we prefer to wait and see how these issues resolve before considering shares a buy and going long the shares.