The Johnson & Johnson Whale: $5.4 Billion Dollars on a Straddle

The Johnson & Johnson Whale: $5.4 Billion Dollars on a Straddle

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Over the past two weeks, a stock market whale has been building a truly massive position in an unsuspecting, low-beta name: Johnson & Johnson. And the options strategy they’re building is one we almost never see at this size: a far-from-the-money straddle. 

In options trading, a “whale” refers to an individual or entity that engages in large and substantial trading activity within the options market. These traders often have significant financial resources and are capable of making substantial bets on the direction of underlying assets or market volatility using options contracts. 

Whales in the options market can have a substantial impact on market dynamics due to the size of their trades. Their actions can influence the prices of options contracts and even the underlying assets they are tied to. When a whale enters or exits a position, it can lead to increased trading volume and volatility in the market. 

What Did the Johnson & Johnson Option Whale Buy?

Every day, we publish on Twitter the “highest volume single-stock option contracts.” While it’s usually Tesla or Apple, lately, it’s been the same contract — every single day. Or rather, the same set of contracts.

Notice the trend? There are a few very weird things about this trade. Firstly, for those unfamiliar, a straddle is an options trade placed on both a call and a put in the same underlying stock, on the same strike, and the same date. Usually, straddles are bought at-the-money, or at least near it. If a stock moves significantly away from the straddle price, the buyer may make money. However, this straddle is nowhere near the money. Johnson & Johnson is currently trading at $172.66 — and over the course of a year, it hasn’t experienced much movement (more on that later). 

When you see the size of this trade, you’ll start to understand what we’re talking about.

For context, that’s about $5.4 billion dollars worth of put options alone when combining the additional straddle at the $230 strike (made by the same trader). 

Another strange thing about this trade though is the massive discrepancy in the value of the call options relative to the put options. You can see it clearly in the screenshot — these call options carry a mid price of $0.15 and $0.02 respectively. The put options offer a mid price of $39.20 and $58.30 respectively. I can’t stress it enough — this is an extremely uncommon way to trade a straddle. In order for these call options to become profitable, Johnson & Johnson would have to surge far beyond its all-time-high in less than a month. The puts, on the other hand, are deep-in-the-money. However, that brings the question — why not just buy the puts? 

Here’s another thing about Johnson & Johnson stock that makes this trade extra strange:

Johnson & Johnson Stock Beta Comparison

Johnson & Johnson is also a low-beta stock. In the stock market, beta is a measure that indicates how closely the price of a particular stock moves in relation to movements in the broader market. It quantifies the stock’s sensitivity to market fluctuations. In other words, beta measures the systematic risk or volatility of a stock in comparison to the market as a whole. As a comparison, Johnson & Johnson’s beta is 0.53 — about half that of the S&P 500. Apple’s beta is 1.32. Nvidia’s beta is 1.75, and so on. So in summary, Johnson & Johnson is a slow-moving stock. That doesn’t necessarily add up with the thesis behind taking a massive position on a straddle. And it really is massive. If you look at the open interest in just about any single-stock option, it won’t look like this. Millions of open interest is extremely uncommon. Millions in an option that costs several thousand dollars? Even more uncommon. 

With that said, some of you may be thinking it’s a hedge. I’m not so sure.

Is the Johnson & Johnson Option Trade a Hedge?

Some institutional investors use options to hedge their portfolio, and mitigate risk. For instance, imagine you have a stock position that you would like to sell after at least one-year of holding, which allows you to pay long-term capital gains tax instead of short-term. A common move would be to sell covered calls against your stock, allowing you to collect premium as you hold onto your stock. Another common move would to buy some “insurance puts” — these are usually out-of-the-money, and bought cheap enough so that if they expire worthless, it won’t cut into your gains. This is far from that. 

These straddles when combined represent a share-equivalent of 259,021,700 shares. That’s more than double the share-count of the third largest holder of Johnson & Johnson stock in the world, Blackrock, which holds 128,702,928 shares in total. And this position is growing in size as we speak. When I began writing this article, the volume on these options today were roughly 20,000 each. When I took the screenshot moments ago, they were above 67,000. As I write this paragraph, the same contracts have grown to >110,000 each in daily volume. Today, these will likely be the highest volume single-stock option contracts once again.

Additionally, about the possibility of this being some sort of hedge is that if it were, there would be no reason to tack on >1.2 million contracts in far OTM call options. The last thing I’ll say about this stock possibly being a hedge is that if you’re worried enough about your stock position to spend over $5.4 billion dollars in put options, you should probably call it a day, sell your stock, and settle with paying short-term capital gains. 

It’s far more likely that this trader sees upcoming downside in the stock, considering the put-portion of the position encompasses more than 97% of the total value of the trade. 

How to Trade Johnson & Johnson

That brings us to a final line of questioning — does this trader know something about Johnson & Johnson that we as individual traders don’t know? And if so, is there some gain to be had in joining them on this trade?

The answer to the first question, we won’t know until the options expire. Johnson & Johnson However, one thing of note: Johnson & Johnson’s short float has risen a surprising 115% since their last reported earnings. Relative to its usual status, Johnson & Johnson is hard to borrow right now. We’re asking, why would a stock so big and liquid be hard to borrow in this environment? When stocks begin to see higher amounts of short interest, they can become a powder keg of potential volatility, leading to abnormal moves in the underlying stock.

The answer to the second question about whether or not to follow this trade is at least somewhat easier. That answer is, no, you probably shouldn’t buy a far out-of-the-money straddle using a $0.15 call and a $39.20 put in Johnson & Johnson. However, that doesn’t mean you can’t make your own trade based on this information. There are cheaper ways to make a bearish trade in Johnson & Johnson that still offer an enticing risk/reward ratio. 

For instance, after a little digging, you’ll find that Johnson & Johnson’s IV Rank currently sits at 66% — which is high. Its IV Percentile is even higher — 91% of days were below the past year’s IV in Johnson & Johnson. When IV is running high, options traders often look to premium-collection-focused strategies to provide the best risk/reward on a potential trade. As an example, one could sell a $165/$180 October 20th expiring vertical call spread (in other words, a credit spread), for a potential credit of $9.75. This is nearly a 1:2 risk/reward ratio, which reaches full profit if Johnson & Johnson expires at or below $165 by October 20th. In the event that something happens in September to drag the price of Johnson & Johnson lower, this theta-positive strategy will still gain in value, getting you closer to the maximum credit even before expiry.

For those who are bolder, one could opt for a simple long-put debit spread using the $170 and $160 strikes as your long and short legs, respectively, expiring September 15th. This would cost a trader $2.28 at the current mid price, offering a near 1:4 risk/reward ratio if, by September, the stock falls to $160. 

In closing, when we drive by a big building in the process of being built in our town, many of us ask, “What will this building be used for?” Likewise, when we see a massive options position in the process of being built, we at Market Rebellion ask, “Why are they building this position?” “What’s the intention here?” and most importantly, “Is there a way we can make money off of this information?” 

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