Shares of JPMorgan Chase (NYSE:JPM) have certainly been under some selling pressure lately. After rallying past the $108 level on March 19, JPM stock fell for five days before stemming the losses yesterday with 1% gain.
Certainly some of the drop was warranted given the unexpectedly dovish Fed decision on March 20. Yesterday’s reversal could be the realization that the selling is now overdone, especially given the attractive fundamentals and oversold technicals. Look for JPMorgan stock to head back over $100 over the coming weeks.
With the Fed making clear it will likely hold rates steady for the rest of the year, look for that to put a crimp in bank earnings across the board. Net interest margin, or NIM, will no doubt suffer a bit in the current interest rate environment. This is especially true now that the yield curve has inverted all the way out to 10 years.
JPMorgan Stock Priced for the Times
JPM at current levels is priced for that scenario, however. In fact, even too priced. Valuations are now at the lowest levels seen in several years. The TTM P/E is approaching 11x and near the cheapest multiple in several years. It is also at a steep discount to the S&P 500 index multiple of 16x. JPM stock is looking comparatively attractive on a valuation basis.
The dividend yield is now back over 3% (3.23%) and is well above the 10-year Treasury yield of 2.42%. This should attract income investors, especially considering the dividend payout ratio of well under 50%.
Consider a Covered Call Strategy
JPM stock has once again reached technically oversold readings that marked significant short-term lows in the past nine days. The relative strength index is below 30 — flashing an oversold sign — and at levels that corresponded with bottoms over the past several years. MACD is also nearing an extreme that coincided with turning points. There is major long-term support at the $98 area which should serve to staunch additional downside.
Implied volatility (IV) has shot up over the past week given the sharp drop in JPM stock. This means option prices are more expensive, favoring selling strategies. Long-term investors may want to consider a covered call strategy — buying JPM stock near current levels and simultaneously selling a January $110 call at $3.00. The premium received by selling the call option acts as an additional dividend, boosting the overall yield. The next ex-dividend date is April 4 with a payment of 80 cents.
Shorter-term option traders may look to sell the April $96 puts and buy the April $93 puts for a 65 cents net credit. Maximum gain is $65 per spread with maximum risk of $235 per spread. Return on risk is 27.65%.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
