Consensus is that JPMorgan Chase & Co. (NYSE:JPM) is an elite bank, so dips in its stock are almost always buying opportunities. The problem is that sustainable dips have been scarce.
There is no doubt that the equity markets are still uber-bullish, buoyed by hopes of fiscal spending and friendly central banks. More specifically, banks also are rising on the promise of less red tape and rising interest rates.
Fundamentally, JPM stock is cheap. It is rare that we find proven winners with a price-to-earnings ratio under 15 and a 1.4 price-to-book. So owning JP Morgan here cannot be a major mistake. This is an important part of my thesis. If today’s trade sours, I will end up owning the stock but at a discount from here.
Click to Enlarge In addition, we recently saw that banks passed the stress tests with flying colors. Most of them told us that they will defend their stocks with financial engineering. We will see massive buybacks and higher dividends. This makes for stocks that are unattractive to short sellers, thereby creating upward pressure.
So my thesis for trading quality financial companies is simple. I want to profit from them by generating income without any immediate risk from temporary dips. Meaning that instead of buying shares at face value, I prefer to sell premium for income below proven support levels.
JPMorgan Chase stock has served me well before and today I want to merely repeat performance knowing I have profits in hand.
Case in point is this trade from June which delivered $1 per contract in profit with zero out-of-pocket expense. This came after another trade in May that also delivered free income. All this with zero cost, from just my promise that I would buy the JPM stock at a discount.
JPM Stock Trade Idea
The Bet: Sell JPM Oct $87.50 puts and collect $1.40 to open. Here I have an 85% theoretical chance that I will retain the whole premium for maximum gains. But if the stock falls below my strike, then I must own the shares and would accrue losses below $86.10. In essence I get paid for the opportunity to buy JPM stock at a 5% discount from today’s prices. This is not a terrible scenario in my book.
If I don’t want to own the shares then I would sell bull put spreads instead, where risk is more limited, so if the worst-case scenario happens I would be hedged.
The Alternate Bet: Sell JPM $87.50/$85 credit put spread where I have about the same odds of winning. This doesn’t come at a terrible compromise. If successful, the spread would still deliver 17% in yield.
Selling options is risky business, so I don’t risk more than I can afford to lose.
Learn how to generate income from options 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.
