The 25 basis-point rate hike that the Federal Reserve announced on Wednesday is sure to help at least one big blue-chip: JPMorgan Chase & Co. (JPM), which should enjoy higher profit margins and thus better earnings (and thus better returns for JPM stock).
It is all about the net interest margin, which the FDIC defines as “total interest income less total interest expense (annualized) as a percent of average earning assets.”
To put it in plain English, JPMorgan Chase raised its lending rates by 0.25 percentage points, but didn’t increase the rate it pays on deposits — so it effectively can charge more money but pay the same to borrow it.
This margin expansion will be a big positive to the bottom line of the big money center banks like JPM, the second-biggest bank by market cap in the U.S.
Click to Enlarge The positive reaction in JPM stock to the 25-basis-point rate increase enforces this notion. Shares of JPM, which initially turned lower with the overall market following the Fed announcement, reversed course sharply and ripped higher to close near the highs of the day. This reversal-type pattern is many times a positive for share prices on a short-term basis.
JPM stock also looks good from a technical perspective on a intermediate-term basis.
Click to Enlarge After trading for two days below the critical $65 support level, JPM stock once again broke back though that level with conviction, putting some definite daylight between the closing price of $67.53 and the $65 area of support.
With the Federal Reserve announcement no longer an unknown, I look for the $65 support level to hold over the next month. Seasonally, the overall market is entering into a generally bullish period, with December being the best performing month over the past 100 years, which will lend further support.
How to Trade JPM Stock
To position bullishly, I am looking to sell a put credit support. Specifically, the trade is to sell the JPM Jan $65 puts and buy the JPM Jan $62.50 puts for a 48-cent net credit. The short strike is structured right at the $65 support level, with the $62.50 put defining the risk. The spread is 13 deltas long at inception.
The maximum gain on the trade is $48 per spread, with the maximum risk being $202 per spread. The return on risk is 23.76%.
I would close out the trade on a meaningful break below the $65 support area, while looking to have the spread expire worthless and keep the initial premium if JPM stays above the $65 level.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
