We’ve had a couple successful trades in JPM over the last few weeks, one long and one short. The stock’s in an interesting technical position, with the $50 level critical long-term support. Meanwhile, the headlines around the legal costs that JPM has incurred were a continual thorn in the side for the company.
The stock is rallying today, mainly in my view on relief that the legal problem has been firmly quantified. The underlying earnings were not that positive, especially considering that revenues were down almost 10% from last year’s 3rd quarter.
So what’s the legal clarity worth?
Well, now that it’s past, market participants are likely to refocus on the company’s earnings power. That’s looking increasingly stagnant. Moreover, the technical setup historically has meant a lower stock price after earnings. As Dan and I mentioned in today’s Morning Word, I wrote about this phenomenon last week:
JPM has been a classic case of a stock that rallies into earnings, and then sells off on bad news. It has consistently done this since early 2010, and I view JPM’s strength over the last week as indicative of a similar setup. Traders are well aware of the low bar, and JPM management’s ability to move accounting levers (such as loan loss reserve releases) to meet or beat analyst estimates.
With that in mind, here’s the trade:
TRADE: JPM ($52.78) Bought Oct25th 52.5/50.5 Put Spread for $0.55
-Bought 1 Oct25th 52.5 put for $0.82
-Sold 1 Oct25th 50.5 put at $0.27
Break-Even on Oct25th Expiration:
Profits: Between 51.95 and 50.5, make up to 1.45, max gain of 1.45 at 50.5 or below
Losses: Between 51.95 and 52.50 lose up to 0.55, above 52.5 lose full 0.55
Trade Rationale: JPM has been stuck between the 50 and 54 range. With earnings out of the way (and relatively weak, all things considered) and JPM near the high end of that range, we want to play for a move back to the low end of that range in the next 2 weeks.