The stock market is trying to recover from a correction phase that started early February. We’ve had two strong pull backs and this is the first week where equity prices are making real upwards progress. The reason for this renewed optimism is that inflammatory headlines are ebbing.
So now we can concentrate on actual fundamentals from the earnings season. First at-bat are bank stocks and JPMorgan Chase & Co. (NYSE:JPM) kicked it off on a good note this morning. Management delivered a solid quarter. They beat expectations and showed Wall Street why they are the cream of the crop.
Fundamentally, JPM stock is not the cheapest of the banks but in absolute terms as still a bargain. It sells at an 18 price-to-earnings ratio and a 1.5 half times book. Valuation this reasonable makes for a good base for hire prices in the future. And therein lies my thesis.
In today’s trade I bet that recent support that was tested on this February correction will hold into 2018 and that prices will be higher in the future. So I will take advantage of the elevated levels of risk that are priced into options to sell downside risk. The benefits of higher CBOE Volatility Index (or VIX) is that I can create income from what others fear.
I will also buy upside hopium to capture profits from the higher prices to come. I consider this a fundamental trade inside a conservative portfolio. If the price goes against me, the worst that could happen is that I own JP Morgan stock at a 18% discount from current prices. This is a worst case scenario that I accept as I believe I can manage profits for the long term.
Click to Enlarge Technically, JPM stock fared much better than the stock market in general, thereby solidifying the fact that it’s a quality stock. JPM is up 5% year-to-date while the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is flat.
JPM prices have established a band of support below $108 per share and that is support against which I can bet. For further assurance, there is another area of strong support just under $100 per share. So today’s trade is two-fold.
The first will generate income from said support. The second will bet on upside potential for incremental profits.
JPM Stock Trade Ideas
The Bank: Sell Sep$92.50 naked put and collect $1.60 to open. Here I have a 85% theoretical chance that I would retain maximum gains. But if price falls below my strike then I accrue losses below $90.90. Those who want to mitigate risk can sell $95/$92.50 bull put spread instead.
The Upside potential: Buy JPM May 25th $116/$118 debit call spread, where I can double my money if price rises through my strikes.
The net effect of both trades is a net credit so I am winner already. As long as JPM stays above my sold puts, any premium I recover from selling the debit call spreads would be pure profit.
Get my free newsletter and subscribe to my YouTube channel 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.