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.