Where’s your investment safe and where is it subject to a heist? Look no further than the price charts of these two great bank stocks to trade — JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS). But if it’s guarantees you’re after, a pairs trade using the options market in JPM and GS is a smarter way to grow or preserve your bank roll. Let me explain.
Investments in today’s market don’t get any more storied and venerable than JPM or GS. But the two bank stocks are nevertheless on different trajectories. There are opportunities for bot bulls and bears to amass new fortunes.
Let’s now take a look at what’s going on in both JPMorgan and Goldman’s price charts. Then we’ll offer a reduced-risk options spread to better capitalize on each bank stock without requiring a bailout if things go awry.
Bank Stock Buy: JPMorgan Chase (JPM)
JPM stock, the country’s largest bank by assets, is both pleasing income investors and setting up its shareholders for more capital gains in the near future. Yesterday the bank stock hiked its quarterly dividend by 43%, from 56 cents a share to 80 cents. This boosts the annual yield to 2.8%.
The move by JPM is the latest in a string of dividend raises by the banker. This further proves its beefed up prowess since the darkest days of the financial crisis a decade ago. It could also be a positive sign regulators are allowing bank stocks more room for capital allocation plans.
On the price chart JPM stock also looks to be firing on all cylinders. The bank stock has been in a healthy corrective basing pattern for the last several months after hitting an all-time high of $118.69 in February. That’s nearly double its pre-crisis high.
The consolidation on JPMorgan’s price chart is shaping up as a cup-with-handle pattern. The technical platform should prove very supportive for continued upside in the bank stock.
JPM Stock Options Strategy
Reviewing the options board for JPM stock, I’m favoring a modified collar. This play buys shares, purchases the Dec $110/$100 put vertical for partial downside protection and sells the Dec $125 call to help finance the position.
With the bank stock at $114.30, this strategy is priced for a premium of 95 cents or $115.25. This position allows for nearly $10 in upside profits into December expiration and the opportunity to seize JPM stock’s new quarterly dividend of 80 cents.
Taking into account the banker’s increased and supportive payout and sturdy technical pattern, this modified collar also offers investors key and realistic protection of up to 9% below $110.
Bank Stock Short: Goldman Sachs (GS)
I’m not actually a grouchy old bear on Goldman shares. Fundamentally, shares have the same macro supports as JPM. Its top and bottom lines have even been growing more rapidly than its peer.
Nevertheless, GS stock has been testing investors’ patience on the price chart and having difficulty with its former pre-crisis high. The bank stock has been testing the prior high for the past few months following a near-failure of this key price level last year.
While an uptrend is still in place, as part of a pairs trade I’m inclined to think Goldman isn’t about to receive an early pardon and will continue to bide its time and pay its technical dues.
GS Stock Options Strategy
Reviewing this bank stock’s options, I like approaching shares with a modified put butterfly positioned below the market. Specifically and with GS stock at $228.89, buying the Dec $205/$195/$180 put combination for even money or no cost is attractive.
If shares fail to collapse lower this position doesn’t penalize the trader. But below $205 profits begin to build and could reach up to $10 on expiration if GS stock is at $195. Should Goldman continue even lower on the price chart, this position eventually breaks even at $185.
The position’s downside exposure is contained but could reach $5 if Goldman sinks below $180. Still, the risk amounts to less than 3% of GS stock. Shares would need to drop an additional 21% on top of its current 17% corrective move. That’s not a bad way to play this anchor banker.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
