Since putting this trade on last week, the stock has gone up a buck and then down a buck and now is in almost the exact spot it was when I initiated the position ~$43.50. As of Friday, following JPM’s earnings that were better than expected, the stock sold off, but not too much and the Apr13th weekly 42 Puts I was short expired worthless, and the Apr regulars that I owned increased in value. Today with the stock up, I am just long the Apr 42 Puts that expire this week…….these puts are worth about .15 with the stock at 43.6, but they will start to decay as we get closer to Friday’s close with the stock above the strike……at this point I am going to look to sell some of the Apr 41 Puts on the next move lower to lock in some premium and create a put spread.
I originally paid .20 for the calendar, now I am long the Apr 42 Puts worth .15, so I am down .05, If the April 41 Puts are at least .15 bid in the next day or so I will hit that bid.
Bloomberg- Market-moving trades by JPMorgan Chase & Co. (JPM)’s chief investment office probably will force regulators to seek more detail on banks’ derivatives positions to help them distinguish risk management from speculation.
Bruno Iksil, a London-based trader in the unit, has built derivatives positions linked to corporate credit that are so big he’s moved markets, according to hedge fund managers and dealers. While Joe Evangelisti, a bank spokesman, said yesterday that the trades are part of the firm’s hedging strategy, four market participants said they resemble proprietary bets, or wagers with the lender’s own money.
Implied and actual volatility are both at low levels in relation to what we saw during the Europe Crisis last fall:
But skew is heavy between the months. The weeklies (in red) being very high, the April regulars (in yellow) a little less pumped and the back months all trading in unison. Skew within the months is to the downside with puts pumped:
This gives an opportunity to sell some near term volatility to try to collect premium on what may be an overpriced event move, then buy some the next expiration that catches the slew of other bank earnings that immediately follow.
MY TRADE: This is a bit cute and as CC says, it’s like “calling a shot”, but I like the risk reward and the reasoning. JPM reports Fri morning, most of the other banks report next week (see below). I want to sell the implied move in JPM in the April Weeklies expiring this Friday, and Buy the April regular expiration as I feel JPM could see some follow-through next week as it’s peers are likely to report less stellar results. I am essentially selling the weekly at about a 54 implied vol and buying the April regular for 37 implied vol, both are very rich to the 30 day realized vol of about 29, but even if both options come into 30 or so, i have offset some of this with the weeklies and am set up for a continuation into next week’s deluge of bank earnings.
TRADE: JPM ($43.50) Bought April13th weekly / April 21st regular 42 Put Spread for .20
-Sold 1 April13th weekly 42 Put at .30
-Bought 1 April21st regular 42 Put for .50
Break-Even on April 13th Expiration:
If stock is 42 or higher I effectively own the April 21st 42 Put for .20. of the stock is below 42 then I make or lose the difference btwn the 2 options, but my max risk is .20