With markets looking increasingly volatile, investors might be more interested in generating income rather than capital gains. 

Johnson & Johnson (JNJ) is a solid defensive play that has held up well so far this year.

JNJ also pays a healthy dividend with the current dividend yield sitting at 2.40%.

Using options, we can generate an additional income from high yielding stocks via a covered call strategy.

JNJ Covered Call Example

Let’s look at two different covered call examples on JNJ stock. The first will use a monthly expiration and the second will use an eight-month expiration.

Let’s evaluate the first JNJ covered call example. Buying 100 shares of JNJ would cost around $18,165. The June 17, 182.50 strike call option was trading yesterday for around $3.00, generating $300 in premium per contract for covered call sellers. Selling the call option generates an income of 1.68% in 23 days, equalling around 26.61% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 182.50?

If JNJ 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 $362 (gain on the shares plus the $300 option premium received). That equates to a 2.16% return, which is 34.20% on an annualized basis. 

Instead of the June 182.50 call, let’s look at selling the October 185 call instead. Selling the October 185 call option for $7.60 generates an income of 4.37% in 149 days, equalling around 10.70% annualized.  If JNJ closes above 185 on the expiration date, the shares will be called away at 185, leaving the trader with a total profit of $1,095 (gain on the shares plus the $760 option premium received).

That equates to an 6.29% return, which is 15.41% on an annualized basis.

These figures don’t include any potential dividends received during the course of the trades.

Of course, the risk with the trade is that the JNJ might drop, which could wipe out any gains made from selling the call.

Barchart Technical Opinion

The Barchart Technical Opinion rating is a 72% Buy with strengthening short term outlook on maintaining the current direction. 

Implied volatility is at 18.49% compared to a 12-month low of 12.87% and a 12-month high of 25.65%. 

Company Description

Johnson & Johnson's biggest strength is its diversified business model. It operates through pharmaceuticals, medical devices and consumer products divisions. Its diversification helps it to withstand economic cycles more effectively. J&J has one of the largest research and development (R&D) budget among pharma companies. J&J's worldwide business is divided into three segments: Pharmaceutical, Medical Devices and Consumer. The company has several drugs covering a broad range of areas such as neuroscience, cardiovascular & metabolism, immunology, oncology, pulmonary hypertension and infectious diseases and vaccines. The Medical Devices Segment offers products in the orthopedics, surgery, interventional solutions and vision markets. The Consumer Segment segment includes a broad range of products covering the areas of baby care, beauty/skin health, oral care, wound care and womens' health care, as well as over-the-counter (OTC) pharmaceutical products.

Of the 12 analysts following JNJ stock, 5 have a Strong Buy rating, 1 has a Moderate Buy and 6 have a Hold rating.

Covered calls can be a great way to generate some extra income from your core portfolio holdings.

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.

*Disclaimer: On the date of publication, Steven Baster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, May 24, 2022.