New Trade JPM: Second Half 2012 Visibility is the Main Event

by Dan July 12, 2012 2:47 pm • Commentary

New Trade July 12th, 2012 at pm:  JPM will report second qtr earnings tomorrow morning before the market opens.   The options market is implying about a 4.5% move which is understandably a bit higher than the 3.2% avg over the last 4 qtrs and the ~2% avg over the last 8 qtrs given the company’s recent “whale watching” issues, or should I say lack there of.

We have considered the actual size of the loss in the CIO’s office as a bit of a sideshow, and strongly believe that the loss of “Best of Breed” status among U.S. money-center banks and increased regulatory scrutiny as a result of their lack of risk oversight will ultimately challenge earnings growth going forward.  That’s what investors in the name should be most worried about.  

Once investors can get by the “Tempest in a Teapot” that was the prop trading issues in the CIO’s office, tomorrow’s earnings call may actually be fairly instructive as to the strength of the bank’s core business of lending, trading securities and of course investment banking in what is proving to be an increasingly challenged environment, regardless of CEO Jamie Dimon’s recent suggestions that the housing market may be close to a bottom.


TRADE:  JPM ($34.32)  Bought the July Regular 33/31 Put Spread for .35
  • Bought 1 July 33 Put for .47
  • Sold 1 July 31 Put at .12

Break-Even (Next Friday) July Expiration:

  • Profits btwn 32.65 and 31, make up to 1.65, max gain of 1.65 at 31 or lower, down about 10% and back to the previous lows made in early June.
  • Losses of up to .35 btwn 32.65 and 33, max loss of .35 or about 1% of the underlying above 33.


Trade Rationale:  Obviously I want to be careful pressing the short here, as there is a lot of bad news in the stock as it relates to the CIO mishap, but again that’s not why we are bearish.  The other worry about pressing the short here is that Jamie Dimon has gotten fairly adept at convincing all his admirers in the investment community and on Capitol Hill that he is the MAN, and that everything is ok!

But again, the bank and the guy has a credibility issue and what they do or don’t do as it relates to their communications with investors in the very near future may decide the fate of Dimon and the ability for the bank to regain the status of ” One eyed King in the land of the blind”.

If management is honest, they will likely speak to the difficult earnings environment in front of them, especially without the prop trading businesses that have added so much in the last few years.