Johnson & Johnson has been under pressure in the last few months, but could be starting to pop up on the radar of value investors.
JNJ stock is currently the most oversold stock in the Dow Jones Industrials Index, with a Relative Strength Index reading of 41.49.
Johnson & Johnson stock pays a healthy annualized dividend of 2.93%.
Income investors can further enhance the yield on the stock through the use of covered calls. Let's look at how a covered call trade on JNJ stock might take shape.
Buying 100 shares of JNJ would cost around $15,405. Traders need to make this initial purchase before selling JNJ calls.
Call Generates $510 In Premium
A May 155 strike call option was trading on Friday around $5.10, generating $510 in premium per contract.
Selling the call option generates an income of 3.42% in just over two months, equaling around 16.66% annualized. That is in addition to the 2.93% annual dividend yield.
If JNJ closes above 155 on the expiration date, the shares will be called away at 155, leaving the trader with a total profit of $605. (That's the gain on the shares plus the $510 option premium received.)
That equates to a 4.05% return, which is 19.73% on an annualized basis.
Of course, the risk with the trade is that the JNJ stock might continue dropping, which could wipe out any gains made from selling the call.
JNJ Stock A Laggard
Investors looking to increase their income can use covered calls on high dividend stocks. Iron Condors are also a great way for traders to generate income during bear markets.
Check out IBD's new OptionsTrader app for options education, trade ideas and more! Download from the Apple App Store today.
One downside is that the stock is not highly rated due to the recent under performance. According to the IBD Stock Checkup, JNJ stock is ranked No. 5 in its group and has a Composite Rating of 36, an EPS Rating of 74 and a Relative Strength Rating of 24.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
