Trade Update $JPM – In Dimon, We Do Not Trust

by Enis September 25, 2013 12:21 pm • Commentary

We put this trade on for a quick technical bounce.  Given that we’ve had that, we have no interest in overstaying our welcome, particularly since Deutsche Bank has already indicated that the 3rd quarter was very weak from a sales and trading perspective, and the mortgage business was likely weaker as well.  Even with a potential settlement with the government, now that JPM has had its first technical bounce off of the $50 level, we see the risk/reward in JPM as skewed to the downside.

ACTION: JPM ($51.50) Sold to close the Oct18th 50 Calls at $1.94 for a $0.43 gain


New Trade $JPM September 24, 2013:  Dimon in the Rough

Ever since the London Whale debacle in the spring of 2012, JPM has been an obvious target for regulators and government lawyers.  The company has racked up billions of dollars in legal fees and settlements, but the legal costs are far from over.  JPM is once again the target of charges from the government over its mortgages in the 2005 to 2007 period in California.

The reduced trading volumes in the third quarter, the continued negative headlines, and the broader underperformance of financial stocks have all weighed on JPM.  Today’s decline has brought the stock to a very important inflection point:

JPM daily, 50 day ma in pink, 200 day in black, Courtesy of Bloomberg
JPM daily, 50 day ma in pink, 200 day in black, Courtesy of Bloomberg

The $50 level has acted as support on two separate occasions since the breakout in May.  The rising 200 day moving average also coincides with that level.

So traders are all focused on that level at this juncture.  JPM will report earnings in 2.5 weeks, and analyst estimates for the investment and large commercial banks have been trending lower in the past couple weeks due to lower anticipated mortgage volumes and difficult bond market conditions over the summer months.

With the stock near $50, what’s the trade?

Our thought is that the quick trade is to play for a bounce.  The stock is down 6% in the past 4 days, and it’s a 8 P/E name, so getting attractive for the value crowd again.  Granted, the business trends are starting to shift against the company, and legal costs could be an ongoing problem for the foreseeable future.  So I’m not a buyer based on a “cheap” valuation. But I think others could be, especially right near $50.

Perhaps more importantly, implied volatility in October 18th expiry options are quite cheap, even though that expiry will capture JPM’s earnings report.  With the $50 level very important support, we want to play for a quick bounce for technical reasons with an eye on the exit if the stock breaks $50 with gusto in the next couple days.  In the meantime, we don’t expect much decay given the low overall premium for this option.

TRADE: JPM ($50.88) Bought Oct18th 50 call for $1.51

Break-Even on Oct18th Expiration:

Profits:  Above 51.51

Losses: btwn 50 and 51.51 lose up to 1.51, below 50 lose full 1.51

Trade Rationale:  Given that JPM is known to beat analyst estimates, JPM stock normally rallies into its earnings number.  Then, when the news on earnings is released, the stock normally sells off since there is no one left to buy the good news.  With that in mind, and given the technical situation, we’re going to take a shot for a quick bound in the stock here.