I’ve been sharing bullish trades in mega banks and money centers based on the assumption that they are still cheap from a price-to-earnings and price-to-book perspectives. Most have remain in the low-teens price-to-earnings ratio and close to 1 price-to-book.
The easy way to trade this group and so not to pick winners is to use the Financial Select Sector SPDR Fund (NYSEARCA:XLF). However, when market-wide corrections happen I prefer being long individual stocks where I can actually rely on individual metrics and I don’t mind owning the shares.
JPMorgan Chase & Co.’s (NYSE:JPM) P/B is approaching 2, which experts deem relatively high to its own history. So the buying could abate from that perspective. However, as long as all banks are rising I just don’t see JPM falling on its own — and therein lies my opportunity. If I am correct then the worst it could do in a rising market is stagnate.
So today’s bullish trade will not depend on upside hopium. Instead, I will use the intrinsic value and quality of JPM to create profits out of thin air. I am confident that the recent supports will hold for the next few months. The stock markets in general were test hard early February and often this creates solid footing for months to come. Without a new shoe to drop, I bet we’ve seen the lows.
Financials are in a best of both worlds. On this dip, investors were nervous about rising rates. On the other hand, banks benefit from rising rates so they are best equipped to flourish as the 10-year treasury yield approaches 3%. I could have used Bank of America Corp (NYSE:BAC) or Goldman Sachs Group Inc (NYSE:GS) for similar trades but the JPM chart looks like has the easier path.
Fundamentally, JPM has a trailing P/E of 18 which is not cheap but it’s not bloated either. There is no doubt that management is proven and that they will not likely give Wall Street specific cause to sell the stock. The financial crisis tested them hard, and since then, regulatory efforts forced all banks to maintain their balance sheets as fortresses.
Click to Enlarge Technically, If JPMorgan stock sets a new high it will have clear sailing with no levels for the bears to short. Closing above $117.50 could be launching pad for it. This could happen within the next two weeks.
I could buy the shares at face value and risk $118 per share without any room for error. But to err on the side of caution, I will use JPM options where I can create a buffer. I will bet that the stock support will hold through then next few months. Wall Street experts agree. Price is still below analyst average price targets with plenty of upside room to go. There is no need for any of them to downgrade the shares.
JPMorgan Stock Trade Idea
The Trade: Sell the JPM SEP $97.50 put and collect $2 per contract to open. I have a 85% theoretical certainty so that I retain maximum gains. Otherwise, I will accumulate losses below $95.50.
Selling naked puts is daunting, especially near all-time highs. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the JPM SEP $97.50/$95 credit put spread, which would deliver over 15% in yield but with much smaller risk. Both setups have about the same odds of success and neither require a rally to win.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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.