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Johnson & Johnson — The Battle of the Bulge
Hey everybody, JD here with your Rational Trader Market Analysis daily.
Earnings season is back, and with it, a ton of clean mean reversion setups. Today I’m looking at Johnson & Johnson (JNJ) — a classic Mean Reversion Cash Machine candidate heading into tomorrow morning’s earnings report.
From One Extreme to the Other
A couple of weeks ago, J&J was trading two standard deviations above its mean — stretched well into overbought territory. Since then, it’s completely reversed course and now sits two deviations below the mean.
In plain English, that’s a huge pendulum swing. It’s what I like to call the “Battle of the Bulge” — when price momentum flips from one extreme to the opposite, creating a tug-of-war between panic and profit-taking.
These kinds of setups are what make mean reversion so reliable. When a stock moves that far away from its norm, it doesn’t take much for it to snap back toward center.
Why I Like This Setup
Let’s take a step back for a second. J&J isn’t some speculative growth stock. It’s a mega-cap healthcare company that trades on fundamentals, not hype. So when I see this kind of volatility in a slow-moving name, that’s opportunity.
Earnings add fuel to the mix. With traders bracing for surprises, options premiums inflate — and that’s when the cash machine kicks in. I’m not trying to guess what earnings will say. I’m taking advantage of the math: overextended price + inflated volatility = premium worth selling.
The Trade
Here’s how I’m structuring it:
- Sell the $195 call
- Buy the $200 call
Both expire this Friday, October 17.
That’s a call credit spread — I’m selling one call and buying another above it to define the risk. The spread collects around 80 cents in premium while risking $5 between the strikes.
That gives me about a 6-to-1 reward-to-risk ratio, meaning I’m collecting roughly 16% of the width of the spread up front.
It’s not about being greedy… it’s about consistency. Over time, those small, defined wins stack up.
Why It Fits the Cash Machine Logic
This trade is pure mean reversion in motion.
When a stock swings from two standard deviations above to two standard deviations below, you’ve got two forces converging — fading momentum on one side, and volatility on the other. Selling premium into that mix gives you an edge: you’re betting against the extremes, not the trend.
If J&J holds steady, drifts slightly higher, or even pulls back less than expected, the spread expires worthless, and you keep the premium.
And if I’m wrong? My downside is capped by that long call. That’s why I like this structure — defined risk, high probability, no surprises.
The Bigger Picture
The best part? This isn’t a one-off. Earnings season is just getting started, and we’ll see a wave of similar setups as big names report. Each one is another chance to let the math work — not emotion, not prediction.
J&J’s just the first volley in what’s shaping up to be a strong week for our Mean Reversion Cash Machine trades.
Good luck, and I’ll see you tomorrow.
Talk soon,
JD
The Rational Trader
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