A strategy idea for options trading investors.
TRADE COMMENTARY: JPMorgan Chase (NYSE: JPM)
In any recovery, JPM will be one of the leading banks in the U.S. and the world. It is best positioned to expand in business-lending, consumer banking and asset management. Also, it has been said that JPM has limited PIGS (Portugal, Ireland, Greece and Spain) loan exposure, and its book has little risk, unlike other large European banks. The financial sector and the banks have taken it on the chin recently so it might be a good time to pick up a best of class name. This strategy allows us to participate in any earnings-related upside for JPM while buffering the downside in case the market continues to be volatile.
DATE: July 12, 2011
STOCK/INDEX: JPM
STOCK PRICE: $39.50
NEXT EARNINGS: July 13, 2011 (Pre-Market)
OPTION PLAY: Covered Call
SELL: 1 September 42 Call @ $0.85
BUY: 100 JPM Stock @ $39.50
NET COST: 39.50 – 0.85 = $38.65
Stock – Premium Collected = Net Cost
DOWNSIDE BREAKEVEN: 39.50 – 0.85 = $38.65
Stock – Premium Collected = Upside Breakeven
MAX PROFIT: (42 – 39.50) + 0.85 = $3.35
(Strike Sold – Stock Price) + Premium Collected = Profit
MAX LOSS: 39.50 – 0.85 = $38.65
Stock – Premium Collected = Net Cost
CALL AWAY % RETURN: 3.35/38.65 = 8.6%
Max Profit/Net Cost = Call Away Return
Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.
