The Donald Trump trade yielded great results for bank stocks at the end of 2016 and beginning of 2017. Investors chased the potential of fewer regulations and higher rates, and as a result, JPMorgan Chase & Co. (NYSE:JPM) is 30% higher than it was a year ago. JPM stock has slowed down of late, but that’s an opportunity for us.
The banking rally wasn’t just based on “hopium” — this was a rare case where Wall Street had it wrong all along. The pros had to reset their valuations on banks because of current facts. And even after this massive rally, JPM stock sells at merely 13 times trailing earnings and barely above book value.
There’s no real reason for JPMorgan to be any cheaper than this. It’s a fortress, and it’s supporting its stock with financial engineering.
Bonds rallied hard Tuesday as Treasury yields plummeted. This caused a market-wide selling of bank stocks. The meme of the day was that the Federal Reserve may not raise rates as fast as promised. Even if this were true, however, it wouldn’t make JPMorgan’s earnings power any weaker by the end of 2017.
And therein lies my thesis.
I believe JPM will do quite well despite the doubts of experts. So I want to bet that proven support levels of late will continue to hold through the fall season. I am willing to place my risk where I would commit to buying the shares, but at a severe discount if I am wrong.
This is much different than chasing a price target. Those can be fleeting and they require additional exuberance to profit. My trade on JPM stock can pay out maximum gains, even if the shares stall or fall.
Click to Enlarge Technically, the recent dip in JPMorgan could have more downside potential, but this year’s range should stay intact. My thesis is that support will hold, so I don’t really need a rally to profit as long as I choose my levels carefully.
The 2016 U.S. election rally caused a 30% spike in JPM stock, so $77.50 would be the rough halfway point. Shares consolidated for a few days there before taking the second leap higher that eventually topped out around $90 per share. So I feel comfortable enough that $77.50 will hold as support.
If not, I am willing to own the stock there, which would be a 13% discount from current levels.
How to Trade JPM Stock
The bet: Sell the Dec $77.50 naked put for 80 cents. Here I have a 85% theoretical chance that price will stay above my strike price through December. Otherwise, I would own the shares, and I would begin to suffer losses below $76.70.
Selling naked puts — especially in a stock with a high price tag — requires margin. To mitigate this risk and lower the overall maximum potential loss, I could sell a spread instead.
The alternate bet: Sell the Dec $77.50/$75 credit put spread, where I have about the same odds of winning. The spread would yield 10% if successful.
Investing in stocks is risky, so I never bet more than I am willing 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 as @racernic on twitter and stocktwits.
