Weekly Option Plays Ahead of JPMorgan Earnings

by Joseph Hargett | April 12, 2012 11:15 am

NYSE:JPM[1]Options traders are pricing in a relatively minor swing for JPMorgan Chase & Co. (NYSE:JPM[2]) shares following the banking giant’s first-quarter earnings report tomorrow morning. Judging by the implied volatility for JPM’s weekly April options, the stock is expected to move roughly 3.2% immediately following the earnings release, placing the shares somewhere between $42.58 and $45.42 by the close on Friday, when the stock’s weekly options expire.

These expectations are not far outside of the stock’s historical post-earnings reactions, as JPM is not typically a volatile security during earnings season. That said, the stock has enjoyed a bull run of nearly 20% since the company’s fourth-quarter earnings report. In other words, bullish options traders with grander expectations might want to target longer-term options somewhere in the June or July series.

Taking a closer look at expectations for JPM’s immediate future, weekly options traders have taken a keen interest in the stock’s April 44 call and April 43 put, which sport open interest of 5,818 and 5,179 contracts, respectively. Other notable weekly open interest accumulations include 4,245 contracts open at the April 45 call, 3,742 contracts at the April 46 call, and 2,660 puts open at the April 44 strike.

Overall, the bias in the options pits is heavily weighted toward the downside. Specifically, JPM’s put/call ratio for the front three months of options arrives at 1.43, with puts easily outnumbering calls, according to data from Schaeffer’s Investment Research. What’s more, this ratio arrives in the 98th percentile of its annual range, meaning that options traders have rarely been more bearishly aligned on JPM.

Not everyone is betting against JPMorgan, however, as the stock is extremely well liked by its peers in the brokerage community. According to data from Thomson/First Call, 29 of the 32 analysts following JPM rate the shares a “buy” or better, compared to just three “holds,” and no “sell” ratings. There is some room for improvement, however, as the consensus 12-month price target rests at $52 – a premium of only about 18% to JPM’s Wednesday’ close at $44.01.

With option implieds falling in line with historical data, much of the potential “oomph” has been taken out of pre-earnings volatility strategies on JPM. Ultimately, entering a play ahead of JPMorgan’s quarterly report boils down to who you believe: the options crowd, or the brokerage community?

Those looking to side with their fellow options traders might want to consider a weekly April 44-strike put. This option currently has an ask price of 50 cents, or $50 per contract, placing breakeven at $43.50 – a move of about 1.9%. To reduce risk and lower their breakeven target, traders might want to consider legging into a bearish put spread by selling a weekly April 42 put.

This option was bid at eight cents, or $8 per contract, midday Thursday, lowering the total cost of the position to 42 cents, or $42 per pair of contracts. Breakeven for the weekly April 42/44 bearish put spread arrives at $43.58, meaning that JPM would have to fall about 1.8% to move below this level. A maximum profit of $1.58 is possible if the shares fall to $42 when weekly April options expire at the close on Friday.

Alternately, for those inclined to follow the brokerage community, a weekly April 44 call, which is currently asked at 85 cents, may be in order. Breakeven lies at $44.85, necessitating a move of about 1.1%. Once again, risk may be lowered by legging into a spread by selling a weekly April 46 call, which was last bid at 10 cents, or $10 per contract. Breakeven for the bull call spread lies at $44.75, a move of about 0.80%, with a maximum profit of $1.25, or $125 per pair of contracts, realized if JPM closes at or above $46 on Friday.

As of this writing, Joseph Hargett does not own any shares mentioned here. 

  1. [Image]: https://investorplace.com/wp-content/uploads/2011/03/jpmorgan.gif
  2. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM

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