New Trade JPM: Fading The Implied Earnings Move, Setting Up For Nov

by Dan October 5, 2012 1:28 pm • Commentary

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

JPM has certainly captured its share of headlines this year from the Euphoric 52 week highs made in late March after the company front ran the results of the Fed’s Stress Tests and raised their dividend prior to receiving the Fed’s blessing, to the early May disclosure of the company’s trading losses from the activities of the “London Whale” in their CIO office.  As the chart below shows, the stock has been volatile with three 30% plus moves in about 9 months.

JPM 1 yr chart from Bloomberg


As we head into next Friday’s Q3 earnings report (pre-open), the options market is implying about a 3% move following the results which is a tad shy of the trailing 4 qtr avg move of about 3.4%.

The stock has since recovered the entire gap from the “Whale” mishap, and Implied Vol is trading within a couple points of the 52 week lows.  The chart below shows how both IV and 5 yr CDS in the name has come in dramatically from the late Spring, early Summer levels, but oddly credit has spiked a little in the last few weeks.  One silly theory here could be that as Obama pulled away a bit from Romney since the conventions, and some investors perceive greater financial regulation in Obama’s second term and thus potentially greater earnings risk for large money-center banks like JPM.  Just a thought because I really cant come up with anything else, why the stock where it is, where Vol where it is, why their CDS would not be towards the recent lows.

JPM 30 day IV vs 5 yr CDS from Bloomberg


MY VIEW:  JPM and the “anointed one” Jamie Dimon have dodged their share of bullets in 2012 and in the end they are probably a better company as a result of the last 18 months.  That being said, Q3 earnings will likely be less than exciting as trading volumes reached levels not seen for more than 5 yrs, and investment banking was also very likely weak.  At this point bank stocks are not likely to trade off of backward looking results, and investors are going to be most focused on how these operations will find new ways to grow earnings and revenues, which under 4 more years of the Obama administration could be challenged.

I want to sell the implied move in Oct for earnings as I feel the qtr will be a non-event, and I want to set up for a bearish set up for an Obama victory in Nov.

TRADE: JPM ($41.96) Bought the Oct / Nov 41 Put Calendar for .48

-Sold 1 Oct 41 Put at .52

-Bought 1 Nov 41 Put for 1.00

Break-Even on Oct Expiration:

-If stock 41 or higher, the Oct 41 Puts will expire worthless and and I will own the Nov 41 Puts for .48, at that point I will look to spread them.

-If stock moves below 41 I will make the difference btwn the Oct that I am short and the Nov puts that I am long.

-My max risk is the .48 I paid for the Calendar


TRADE RATIONALE:  This week’s presidential debate clearly changed the tone of the election, and with just a month to the big vote, there are many who are hopeful that the tides have just turned for the Republican challenger.  Having nothing to do with what I hope the outcome is, I do not think Romney wins, and any new-found optimism for stocks/sectors that would have benefited from Obama & Co out of office, are likely to face disappoint in Nov.

Since I am selling Oct implied vol at 27.5 and buying Nov at 24.5, the trade sets up well for more volatility around the elections, particularly for a name like JPM, which has rarely realized less than 20 volatility in the past 3 years.

I am putting on a small position today (probably a 1/4 of that my position will be), and will take a much closer look on Wednesday and Thursday when it appears that my chosen strikes are appropriate heading into the print.