New Trade $JPM: Dimon Mining

by Dan March 7, 2014 3:35 pm • Commentary

JPM held their annual analyst meeting last week and while the street generally walked away satisfied with the commentary, headwinds to the sector and JPM specifically remain.  Bernstein Research analyst  John McDonald had a very succinct summation of the event in a research not dated Feb 26th:

management highlighted opportunities to leverage organic investments, improve efficiency and profitability, and benefit from the build-up of excess capital and eventual rise in interest rates longer-term. In the near-term, revenue growth remains a challenge and the focus will remain on improving expenses and preparing the company to succeed in the new regulatory environment and an increasingly digital world. We trim our 2014 EPS by $0.25 to $5.70 on softer trading revenues and expectations for smaller reserve release, but maintain our forecast for 2015 at $6.35 and our view that longer-term EPS power can approach the $7 level that management is targeting. With the stock’s valuation still lagging peers and historical averages, we think JPM offers (improving) quality at a reasonable price, and maintain our Outperform rating with a price target of $64.

While the near term fundamentals may remain constrained, the technical set up could cause some traders to play for a move back towards recent support. The one year chart below shows this morning rejection at the previous high from January, just below $60:

JPM 1yr chart from Bloomberg
JPM 1yr chart from Bloomberg

On the downside, $55, which also corresponds with the 200 day moving average should serve as very solid near term support.

With the analyst meeting out of the way, and analysts slightly lowering their estimates on the company for 2014, the next identifiable catalyst will be the Federal Reserves Stress Tests to be released March 20th and 26th, and JPM’s Q1 results scheduled for April 11th.   I think it is safe to say that most data points are suggesting that Q1 will be less than stellar as trading volumes are weak, the deal calendar slower and mortgage activity down.

Now throw in the in recent spate of volatility emanating from the situation in Ukraine and we have the potential for some near term volatility on our shores as we witnessed this past Monday.  For example of what could come, the EuroStoxx Bank Index closed down 2% today as the components have close banking ties with Russian and Eastern European countries and any heightened tension in the region or fear of Ukranian default could cause reverberations.  Our banks, while having little exposure to the region as a percentage of total sales and earnings, are not pricing any risk of some sort of geo-political event.

Implied volatility (IV) is fairly cheap in the name with April options that capture both sets of events trading at about a 19 vol, not far off from the levels that it usually bottoms out at post earnings events.  Outright premium purchases look attractive as the IV usually rises to the mid 20s prior to earnings which should help offset some of the time decay as we get closer to the event.

JPM 1yr chart of 30 day at the money IV from Bloomberg
JPM 1yr chart of 30 day at the money IV from Bloomberg


Trade: JPM ($59.40) Buy the April 11th Weekly 59 put for 1.45

– Buy 1 April 59 put for 1.45

Break-Even on April 11th Weekly Expiration:

Profits:  below 57.55 gains

Losses:  Between 57.55 and and 59 lose up to 1.45, above 59 lose the full 1.45

Rationale: it is our opinion that investors in the U.S. are a tad complacent at the moment, and the risk assets on this side of the Atlantic are not adequately pricing the potential for a geo-political event.  This is not meant to be a long term bearish bet, and if the stock can get through the next few weeks and continues to base below $60 I would be inclined to play for a breakout.  In the meantime, vol is cheap, and the technical set up looks attractive to play for a failed breakout with defined risk in front of some potentially volatile events.

We will look to spread these puts by selling a lower strike put on the first big down day in the stock, thus lowering our break-even.

We are using the April 11th weekly because they expire on the close the day that JPM is set to report their earnings, the last of the identifiable catalysts.