On Friday we noticed unusual option activity in Johnson & Johnson. The biggest trade of the day was the sale of 22,500 Jan. 67.5 puts for $0.46 and simultaneous purchase of the same number of Jan. 60 puts for $0.07. This is a bullish trade done for a net credit of $0.39 that bets JNJ will be above 67.5 at expiration. On Oct. 16th JNJ reported better than expected earnings and raised forward guidance, which has sent the stock up over 4% since then. This has created a bullish chart pattern with strong support at 67. By selling the 67.5 puts this trader is choosing that as a level they are willing to buy the stock at. They hedged this sale by buying the 60 put, which reduces the risk and margin required for the trade by getting them out of a long stock position there.

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.