New Trade JPM – Doubling Down on Dimon

by Enis June 28, 2012 9:58 am • Commentary

I hate doubling down.  It usually means throwing good money after bad.  After losing so many times as a trader, you eventually learn to stop.  So I almost never double down.  Today I am making a rare exception.

I’ve laid out in multiple posts (examples here, here and here) on the site in the past month why I view the JPM Whale losses as much more significant than just the headline news.  It’s not the one-time loss that is a big deal.  That gets discounted, and investors look to the future.  It’s the future loss of earnings and change in business practices that truly matters.  In JPM’s case, that means far less proprietary trading.  It means no more special treatment from the regulators and the Fed (like when they were allowed to buy Bear Stearns and Washington Mutual with loss insurance from the government).  And it means lower earnings going forward.

The issue in situations like these is always, when will this get discounted by the market?  I might be right on that thesis, but until others start to agree with me, the stock won’t go down to reflect that.  Today’s NYT article is further fodder to nudge market players in the direction of my thinking.  And the technical setup looks ripe as well:



The stock was rejected at its 50-day ma, and is back below its 200-day ma.  Meanwhile, European banks (as measured by SX7E index) have had a terrible week, and Spanish and Italian sovereign yields are back near their highs.  I have thought all along that this week’s summit would be a disappointment, and JPM’s stock specific story will make it a leader on the downside among U.S. investment banks if the European story deteriorates.


Here’s the trade:

TRADE: JPM ($35.52) Bought the August 36 Puts for $2.24
  • Bought 1 August 36 Put for 2.24


Break-Even on August Expiration:

Profits below 33.76.  Losses of up to 2.31 between 33.76 and 36.  Max loss of 2.24 above 36

Trade Rationale: I wanted more delta exposure than normal because I think 36 should act as strong resistance on JPM going forward, but I also did not want much time decay as I’m less confident on the timing of the move in JPM.  I plan to turn this into a put spread on any significant move lower, and then might adjust the trade again ahead of earnings on July 13th, which will be closely watched given that Jamie Dimon has said that the full losses on the position will be disclosed then.