Stock Repair Strategy for Johnson & Johnson

• Posted by Greg Harmon
• on October 15th, 2014

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First, let me say in no way am I calling a bottom on this pullback. It may be or it may not be. But at some point prices will stop falling and if you are long term investor or even just a position trader you will be looking at how to ‘get out of the hole’. One way to do that with the stocks in your account that have weathered the pullback is through a stock repair strategy. This is simply selling Covered Calls against your stock, but instead of pocketing the premium, using it to buy a Call Spread along side the stock. Let me illustrate with Johnson & Johnson.

The weekly chart for Johnson & Johnson shows it pulling back to the rising trend line and the possible support zone highlighted between 94.25 and 95.60. The company just reported good earnings and it is getting beat up anyway. It may stop at support and it may not. But if it were to stop, a possible strategy would be to sell the November 100 Covered Call (bid at $1.23 as I write this) and then also buy a November 97.5/100 Call Spread (offered at $1.25).

The net cost is basically zero without commissions. If the stock does not rise you lost nothing. If it rises only to 100 your position has increased in value to the equivalent of $102.50, from the extra $2.50 from the Call Spread. If the stock continues to rise and gets called away from you it is still a wining position until the price gets above 102.50. and you can always roll out the Covered Call later if you wish to continue to hold the stock.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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