Wall Street perceives JPMorgan Chase & Co. (NYSE:JPM) as a premier bank in its class, so there is no need to argue for its particular fundamentals. They are proven performers beyond reproach.
The financial sector benefited from Trump’s election, as he promised (and is delivering) on unshackling them from red tape. So investors flocked into banks in anticipation of better P&Ls from lower expenses.
Furthermore, the outlook of financials is also made rosier by the prospects of higher rates. The U.S. Federal Reserve is in the middle of a rate hike cycle and the perception is that banks will subsequently profit. Whether it’s true is almost immaterial, as perception is what drive stock prices.
And that’s how I trade memes like the financial consensus at hand. I sell risk against proven support levels where buyers or sellers would step in, then I let time do the work. Case in point, on March 21 I shared a bullish JPM trade that yielded easy profits without the need to have a perfect entry or exit points.
Sure having solid fundamentals matters, but using options eliminates the need to be surgical with my trade entries.
Click to Enlarge I can’t tell you where JPM will close in the next few months, but I am confident that buyers will step in if JPM stock falls 20% or more.
So the trick is to find likely support levels and using time I can find trades with 90% certainty of success.
The Trade: Sell JPM Sept $72.50 naked put and collect 70 cents per contract. This is a bullish trade that comes with 95% certainty that the premium will expire worthless in my favor.
I chose $72.5 because that would even account for half of the potential weak hands who chased the rally in November 2016. But if I am not willing to own JP Morgan Chase shares at $72.50 then I would change this trade to be a credit put spread instead.
The Alternate: Sell the JPM Sept $75/$72.50 credit put spread. This trade has a slightly smaller price buffer, but still yields 9% on money risked. The beauty of selling downside risk is that I don’t need JPM to rally. I profit as long as price stays above my sold risk.
Email firstname.lastname@example.org with questions or join me to learn more about options in a personal 1on1 webinar here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.