The rally in banks that started in 2016 has been awe inspiring. So it’s no surprise that JPMorgan Chase & Co. (NYSE:JPM) stock also ran 60% from low to high in a year. Fundamentally, a rally of this magnitude usually is a result of severe mispricing from Wall Street.
To be fair to analysts, there were also outside factors keeping a lid on all financial stocks.
A decade ago we got the mother of all financial debacles which brought banks to their knees. Then the Fed took rates to zero thereby greatly impacting bank P&L’s. Then the regulatory hammer came crashing down on the financial institutions that survived.
Click to Enlarge In 2016 the two major anchors weighing down banks were cut loose. Donald Trump won the election and promised to slash regulations. And, the Federal Reserve resumed its rate hike cycle. Both of these offer great upside potential to banks’ financial performance.
Wall Street quickly priced in the benefit and perhaps too fast. This could have caused an overshoot situation.
So is it too late to go long JPM stock at these altitudes? No. But instead of risking $90 per share buying JP Morgan, I will use options. There I can design trades that allow room for error.
JP Morgan is often considered as the cream of the crop, so I will leverage that fact to generate income.
JPM Stock Trading Advice
The Bet: Sell the JPM Dec $70 naked put. This is a bullish trade for which I collect $1.50 or better per contract to open. In return, I commit to buying JPM shares at $70 even if they fall below it. This would constitute a 20% discount from current levels. Since I would be open to losses below that, I only risk money I can afford to lose.
Usually I like to sell opposing risk to balance my trade. In this case, I am willing to risk leaving the risk un-hedged. I feel that the time-until-expiration is long enough that I will be able to manage around short term price moves.
I could opt to buy a few shorter-dated puts to hedge me against a potential downfall.
Learn options as easy as 1-2-3 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.
