Unusual Put Option Activity in Johnson & Johnson After JNJ Stock's Recent Runup

Today, there has been unusually large put option activity in Johnson & Johnson (JNJ) following the stock's recent rise. The puts are out of the money (OTM), implying that some investors believe JNJ could tank.

JNJ stock is up again today, over 3.0% to $268.29. Investors seem to be buying ahead of its upcoming earnings release next week on July 15, before the market opens.

After all, last quarter, the drug and medical device company produced strong earnings from its cancer drug sales. As the Wall Street Journal (WSJ) reported, this growth overcame a steep decline in sales of Stellara (for skin and digestive conditions).

The company's cancer drug sales rose 22% in Q1, and investors may be hoping to see further developments like this in Q2. 

For example, analysts are now projecting $25.05 billion in Q2 sales, vs. $23.74 billion last year, +5.5% higher. Any sales higher than $25 billion could be considered unexpected. That level seems too low, so investors have been pushing JNJ stock higher.

This could be why there is unusually heavy put options volume today. Investors may believe that this recent JNJ stock run-up has been overdone.

Unusual JNJ Put Options Volume 

This can be seen in a Barchart report today. The Unusual Stock Options Activity Report shows that the $252.50 put strike price contracts have had 44 times the prior number of put contracts outstanding traded for the period ending July 17.

Over 7,300 puts have traded at that strike price, which is well below today's price, i.e., “out-of-the-money.” Moreover, the premium paid for these puts is between $1.64 and $1.98, or $1.86 at the latest.

That means that buyers expect JNJ will drop to below $250.64 (i.e., $252.50 - $1.86), before their purchase will have any intrinsic value. That means that the investor will have to hope JNJ will drop 6.6% or so from its present price before they can sell 100 shares at $252.50 and still make a profit.

Clearly, they expect that the JNJ earnings news on July 15 (before the market opens), three days before these options expire, will be disappointing. However, if the news is not disappointing, the investor buying these puts could lose 100% of their investment.

On the other hand, short sellers of these puts can make an immediate yield of 0.736% (i.e., $1.86/$252.50) over the next 10 days. These investors are willing to have their account assigned to buy 100 shares at $252.50, as the breakeven point would be $250.64.

That could result in an unrealized loss, although not 100% as a put option buyer could end up with.

The bottom line is that short-put investors are hoping for good news out of JNJ on July 15.

Analysts Are Mixed on JNJ Stock

So far, analysts are positive on JNJ, as their average price targets are mixed, with some higher and some lower. For example, Yahoo! Finance reports that the average of 23 analysts is $257.50, with a high of $285.00 per share.

Barchart's mean survey price from analysts is just $260.04, somewhat below today's price. However, AnaChart shows that 21 analysts have an average of just $239.44 per share, well below today's price.

The bottom line is that this heavy JNJ put option volume today is probably equally instigated by both buyers and sellers, given the uncertainty related to the upcoming earnings report as well as the recent stock price run-up.