JPMorgan Chase (NYSE:JPM) beat on earnings, and investors are so far hesitant to buy the headline. It is important to note that the headline price action is better than the reactions to Citigroup (NYSE:C) and Wells Fargo & Company (NYSE:WFC) which are both down 2.5% and 3.2% respectively. So relatively speaking, JPM is a winner.
Recently, consensus on Wall Street is that banks cannot rally. The notion that higher rates are good for banks has faded and turned into fears of a flattening yield curve. Banks prefer a wide spread in rates so they can borrow low and lend high.
Nevertheless, there is tremendous value in the bank shares and therein lies the opportunity. JPM stock sells at a only 15 trailing price-to-earnings ratio and a 1.5 price-to-book. So owning the shares here is not likely to be a major mistake.
Yet, given the investor malaise that currently drapes the banks, buying JPM shares here as good a deal as they are is still a risky proposition for the short term. So today I share a setup that will profit even if the stock goes nowhere or falls a bit in 2018.
I use options where I can create room for error thereby eliminating the need to be surgical with my entry timing. I know that there is value at these levels so I am even more confident owning JPM 15% cheaper.
JPM Options Trades
Technically, there is upside potential catalyst. If JP Morgan stock can rally above $108.75 it could invite momentum buyers to $111 per share. But I don’t like to anticipate the breakout so I will wait until it happens before I add a Sep debit call spread at $110 for that leg.
Meanwhile, I will settle to creating income out of thin air by selling downside risk into what others fear. Given the current Wall Street sentiment on banks, I am more confident in proven support levels holding than upside hopium. This way time is on my side and the general investor hesitation also actually works for me.
There is upside potential in JPM stock in spite of the Wall Street malaise. It’s easy to regurgitate the consensus opinion but smart money trades the fundamentals and JPM has those in droves.
Click here for an opinion video on bank earnings in general and how like to approach the earnings season trading opportunities.
The Trade: Sell JPM Jan 2019 $92.50 naked put. This is a bullish trade where I collect $2.10 to open. Here I have a 85% theoretical chance of success. But if price falls below my strike then I accrue losses below $90.40.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the JPM Jan 2019 $92.50/$92 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 15% if successful.
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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.
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