This trade is a good example of how to use options to get long exposure to a stock. This trade will require the trader to put up $7.11 in margin versus 71.86 to buy the stock now. As long as JNJ does not drop over 6% between now and January expiration this spread will realize its full value and return an annualized 22%. However, unlike a stock position it is possible to lose the entire amount invest in this spread if JNJ drops below 60m, or 16% from Friday’s close.
For traders looking to get long JNJ but who do not want to chase the stock, this is a good alternative that can make money in an up, sideways, or modestly down market. As long as the position is sized appropriately and you are willing to buy JNJ at 67.5, consider this spread as an alternative to buying the stock.