Update: JPM Redux: Bank Stocks Like A Monsters’ Ball- “Short the Best Of Breed”

by Dan August 15, 2011 3:40 pm • Commentary

Update: Friday on CNBC’s Options Action I suggested the trade detailed below, watch video 4 mins in:

While the video is pretty interesting, what I found more interesting is that a large player (possibly 2) today agreed with this take and bought the JPM Sept 35/30 Put Spread for .97, one print was for 4500 contracts and another around the same time for 1815 contracts.

With the stock up 2% on the opening the buyer of this spread was able to get a wider spread for not much more premium.  JPM under-performs BAC up 7.4% and C up 4% today.

The SPX is trying to get through and important resistance level of 1200 here and I want to keep a close eye on the banks here as to me that hold the key whether the market can really get some legs and test and even bigger resistance level at 1250.

Original Post Aug 12, 2011:

If it weren’t for the bank stocks today the SPX would likely be back above 1200…….but this little market we are in has its own ideas for these stocks. I think you would have to be a little nuts to press them as shorts here as any little bit of good news could cause an epic short squeeze…….but while I am not completely nuts I do feel that these stocks are going to make new lows which could culminate in a massive capitulation.    I had a similar view back in May (read below) and I was a little early, but I want to come back to it even at much lower levels as I feel we know a whole heck of lot more now than we knew then.

The financial press keeps dubbing JPM CEO Jamie Dimon silly things like the Steve Jobs of the Financial stocks, well I think that is just downright stupid…….JPM, while better positioned for the “worst case scenarios” than BAC and C, if the time comes even the venerable Jamie Dimon will be  forced to meet the same maker as Brian Moynihan and Vikram Pandit…..oh and Jamie Dimon never created anything that hundreds of millions of people the world over have craved.

As expected Vols have exploded in the space and outright premium purchases are very expensive.  If you want to define your risk on a bearish bet it may make sense to buy vertical spreads and at least of set a bit of the decay that is likely to happen if the space settles a bit……{##34##}

I want to make a bearish bet that the coming weeks will see lower lows and the move lower in the SPX will likely be led by the Bank stocks……

JPM $36.00–BUY Sept 34/30 Put Spread for .90

-Buy Sept 34 Put for 1.70

-Sell Sept 30 Put for .80

Break-even on Sept Exp:

Losses: btwn 34 and 33.10 lose up to .90, above 34 lose all .34 or 2.5% of underlying

Profit: btwn 33.10 and 30 make up to 3.10, below 30 make full 3.10

TRADE RATIONALE:  As I stated above, you don’t want to be naked short stocks like JPM that are so severely oversold, but it does make sense to place some chips on the table if you think we have not seen the worst…….these stocks have not seen broad capitulation even though they look like they have crashed of late…..I want to see JPM’s NYSE specialist one morning have JPM spread $4.00 wide because of a massive sell imbalance, I want to see it print on huge volume and then maybe they will be done…..

Tehnically, a close below 35 would be fairly bearish as that is a support level dating back to 2007 before the start of the financial crisis……If it breaks 35 in a meaningful way it will likely go straight to 30 in my humble opinion.

[caption id="attachment_4080" align="aligncenter" width="300" caption="4 yr JPM chart from Bloomberg"][/caption]


Original Post May 20, 2011:   Bank Stocks Like A Monsters’ Ball- “Short the Best Of Breed”

Wall Street has it’s share of over used, generally nonsensical terms that add little to no value to individual investors. One that I hate is best of breed. You hear it on the teevee a lot, or by analysts trying to differentiate between names in their coverage….the fact is that most large cap names are very correlated and most out-performance doesn’t last in challenging times. [private]

And that’s what could happen this summer….maybe not a crash but a 10% sell off from the highs? Very possible.

Financials have dramatically under-performed the overall market and it is my belief that the market will not be able to make a new high without them participating. I just don’t see that happening.

C, BAC, GS and MS all act like crap and while you can probably press these, maybe another 10% down, I would prefer to go after JPM.  C and BAC are both down about 13% ytd while GS (for some stock specific issues) is down 18% ytd…..JPM is actually up 2% on the year.  Te chart below displays the massive under-performance by financial stocks to the SPX and also shows JPM’s out-performance to its peers…..

Longs should consider stock replacement but I want to make an outright bearish bet. I just bought the July 42 Puts for 1.20. Will try to leg into the Put spread or fly as stock goes lower.   I want to look to July as it should capture Q2 earnings report estimated to be July 15th.   I am Considering the following trades:

TRADE 1: JPM (43.20) BUY July 42/39 Put Spread for .75
-Buy July 42 Put for 1.20 and
-Sell July 39 Put at .45

Break-Even on July Expiration:
above 42 lose .75
btwn 42 and 41.25 lose up to .75,
btwn 41.25 and 39 make up to 2.25,
below 39 (down10%) make 2.25 or ~3x your money


TRADE 2:  JPM (43.20) June 42/40/38 Put Fly for .25

Buy 1 Jun 42 Put for .62

-Sell 2 Jun 40 Puts at .50 (.25 each)

-Buy 1 June  38 Put for .13

Break-Even on June Expiration:

Btwn 42 and 41.75 lose up to .25,

above 42 lose .25, btwn 41.75 and 40 make up to 1.75,

at 40 make full 1.75,

btwn 40 and 38 payout trails off,

below 38 lose .25