Trade Update JPM: Closing Half of June 36/34 Put Spread for a Double, Now I Can’t Lose

by Dan May 17, 2012 9:37 am • Commentary

Trade Update May 17th, 2012 at 9:40am:  Since Buying this June 36/34 Put Spread in JPM on Friday the stock is down another 8% as the media, regulators, politicians and shareholders continue to press the company on how, why and even the legality of the “self inflicted wounds” the bank incurred and continues to incur in their CIO’s office.   This is playing out exactly how we expected, a page out of the 2010 GS Abacus playbook…….at this point with the stock at 34.50, I am selling half of the put spread that I bought for .50 at 1.00, locking in 1 double on half of the position, now I can’t lose on it.


Original Post May 11th, 2012:  New Trade JPM: Call Me Iksil, Part Deux?  We Press this Whale of a Short

Here is a quick preview of what I will be discussing tonight on Options Action at 5pm on CNBC:

With JPM down about 8.5% on last night’s revelation that the company has a large loss in a position that has gone against them, the natural inclination by many contarian or daring investors would be to discount the news as a one time event and fall back into the trance that Wall Street Analysts and the Financial Press had most of us under as JPM being head and shoulders above its peers.  I think yesterday’s news will keep the stock in the penalty box for months to come as the company will need to earn back investors’ trust,  through actions, not words, and this will take time.

As we consider the stock’s price action today and the street/investors’ response, we think there can be a fairly easy comparison made to the situation that GS faced back in April 2010 when headlines broke about the charges from losses on their Abacus deal.  The stock was at post-financial crisis highs when the news broke (see chart of GS price action below).  The stock got nailed on the first day but went down for weeks to come.

The progression for GS in April 2010:
-Headline broke about the charges.
-Lambasted in the media from all sides.
-Lost its standing as the premier U.S. financial institution.
-Stock never regained previous heights.


GS chart Jan 2010 to July 2010 from Bloomberg


OUR VIEW: We think JPM will follow a similar pattern.  Throw out all the fancy valuation metrics that bulls will explain away, why it is Cheap, etc, this is in a sentiment trap and we are likely to see a bit more fireworks before this settles out……We want to press the short……You could wait for a bounce and put this on, we will likely get a little one, maybe even Monday, but it should be sold in my opinion……we are putting on a half position here and will look to add on strength.


TRADE: JPM ($37.20) Bought the June 36/34 Put Spread for .50

-Bought 1 June 36 Put for 1.00

-Sold 1 June 34 Put at .50

Break-Even On June Expiration:

Profits btwn 35.50 and 34 make up to 1.50, max gain of 1.50 at 34 or below

Losses of up to .50 btwn 35.50 and 36, with max loss of .50 36 or above.