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Thursday, July 22, 2010

Johnson & Johnson (JNJ) Hedge

With the news lately of the lawsuits surrounding Johnson & Johnson (JNJ) products? I'm doing a couple of things to protect myself. I wrote some of this in an issue of "Airelon's Market Tactics", but as this impacts the challenge project, I will mention them here; albeit a bit modified.

This recent slide in Johnson & Johnson (JNJ) stock began with some complaints at a plant regarding “smudge and dirt” (I'm not kidding) around a piece of equipment at one of their plants. While that does not sound serious, in a “clean” environment ... it can be. The news quickly slid into discussions of 'deaths, but deaths that cannot be linked to Johnson & Johnson products'. I'm always in risk control mode. And all I know is that we've gone from a discussion of smudge and dirt in a clean room, to a discussion of death.

I really wouldn't care to be left holding a sizable position in Johnson & Johnson (JNJ) while the image of a dead child is paraded across the television set for the entire nation. No matter how unrelated to product, it's still being discussed in the same sentence in the press. And in today's world, image and perception is enough to convict.

Now in order to place my next comments in context, it may be wise to review a “Week in Review” podcast that I published some time ago … when I had a subscriber of the daily blog ask me what “I” would do, if I were a long term BP Investor. In that podcast, I described an option strategy for BP investors that could have saved them a bundle (Those 30 puts, after this bounce we've experienced in BP? Are still worth 2.91 up from 0.25). I'm going to lay out something similar here for Johnson & Johnson (JNJ).

Now the first part of the strategy, for larger accounts, I've already accomplished. I'm not talking about “Airelon's Market Tactics” now, but larger accounts. I'm turning off the DRIP. The dividend probably won't be paid until September 8th, but it's something that I need to do. I also bought a little more Johnson & Johnson (JNJ) at these levels on larger accounts. I am after all ... a dividend investor and we don't know what the future will bring. We could get a serious bounce at these levels. Johnson & Johnson (JNJ) after all, has been sitting on a mountain of cash and could weather this storm easily.

But I'm not stupid. As I said, we don't know what the future will hold, so I'll also be looking to hedge this position with put options. What is my 'breach' level? At first I thought I'd start buying these options at $56.00 but at this point, I'm going to go ahead and start buying them at a break below the region of support around $57.00.

Johnson & Johnson
(Weekly Chart)

Which option? The October 50 Puts, which as of right now, are going for about 0.48, or $48.00. How many? I'll purchase 2.5% of the existing Johnson & Johnson (JNJ) position in put options.

Again, these comments are in regards larger accounts.

What about the Challenge Project? First … again, the DRIP is off. That's just for starters and housekeeping.

Next, look at the exposure. $293.95 worth of Johnson & Johnson (JNJ). To put this in context … Johnson & Johnson (JNJ) could be wiped off the face of the planet tomorrow, and we're only talking about a trip to the store for groceries.

That goes back to my comments a few months ago regarding 'weighting' my sisters according to the economic environment we find ourselves in.

Regardless, the DRIP is off. The position itself is so small, that I cannot see buying a hedge to protect such a tiny position. But I may consider seriously beefing up the 'investing sister' account in the future, either through rule no. two, or some other measure. Stay tuned for details on that route.

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 14 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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