Johnson & Johnson has held up reasonably well this year. JNJ stock has also shown a significant improvement in relative strength in the past two months.
JNJ stock has risen as much as 19% in the past three months, while the S&P 500 is down around 8% in that period.
According to the IBD Stock Checkup, JNJ stock ranks No. 4 in its group. It sports a Composite Rating of 92, an EPS Rating of 73 and a Relative Strength Rating of 91.
Income investors can further enhance the yield on the megacap health-care stock through the use of covered calls. Let's look at how a covered call trade on JNJ might take shape.
JNJ Stock: The Covered Call Strategy
Suppose you recently bought 100 shares of JNJ stock for $18,165.
A June 182.50 strike call option traded Tuesday around $3 per share, generating $300 in premium per contract. Selling the call option generates an income of 1.7% in just under one month, equaling around 26.7% annualized. That is in addition to the 2.5% annualized dividend yield.
If JNJ stock closes above 182.50 on the expiration date, the shares will be called away at 182.50, leaving the trader with a total profit of $385 (gain on the shares plus the $300 option premium received).
That equates to a 2.2% return, or 34.2% on an annualized basis.
Of course, the risk with the trade is that JNJ stock might drop, which could wipe out any gains made from selling the call.
Investors looking to increase their income can use covered calls on high dividend payers, including JNJ stock. Iron condors are also a great way for traders to generate income during bear markets.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
