Rebound seen for Johnson & Johnson
David Russell | firstname.lastname@example.org
optionMONSTER's Heat Seeker monitoring program detected the purchase of 5,000 July 82.50 calls for $2.46 and the sale of 10,000 July 87.50 calls for $0.48. It resulted in a cost of $1.50.
The trader now stands to collect $5 if JNJ closes at $87.50 on expiration. Gains will erode above that level because of the larger short position at the higher strike, turning to losses over $92.50. Known as a ratio spread because twice as many calls were sold as the number bought, the strategy is employed to amplify a move of limited size. (See our Education section for more on how to harness the leveraging power of options.)
JNJ rose 0.36 percent to $84.46 yesterday. The health-care products giant rallied 25 percent between the start of the year and late May, when it established a new all-time high of $89.99, but has been skidding lower since.
Volume was below open interest in the July 87.50 calls, so it's also possible that an existing position was closed at the lower strike and rolled down. The move would let the investor raise their delta to 295,000 from 160,000, thereby increasing correlation to a near-term rebound.
Calls outnumbered puts in the name by a bullish 3-to-1 ratio, according to the Heat Seeker.