Name That Trade – $JPM: Cut to the Chase?

by Dan October 13, 2015 11:33 am • Commentary

Event: JPM reports Q3 results tonight after the close. The options market is implying about a 2.5% one day move, which is shy of the 1.75% average over the last 4 quarters, and basically in line with the 10 year average.

Price Action / Technicals:  JPM is down about 1.5% on the year, and down about 13% from its 52 week highs made on July 23rd.

The one year chart (below) shows the importance of the $60 support level, which is the level the stock regained following the morning panic on Aug 24th.  The recent move back to the downtrend (from the July highs) was anemic at best. Regular readers will recognize the Triangle of Death:


I guess there are a couple ways to consider the ToD, because it is nothing more than identifying up and downtrends and support with a certain sense of symmetry.  If JPM were to report poor results and guidance, its sector continues to be under-pressure and/or the broad market were to head lower, then a rejection at the downtrend and a break of $60 support would all make sense with little support until the mid $50s.  On the flip-side a beat and raise with the broad market finding some footing (as it appears to have done of late despite bank stocks poor relative performance) then a break to the upside of the downtrend and a consolidation above would suggest a bearish to bullish reversal. Technical inputs work until they don’t and we rarely if ever place trades solely on one input.

Vol Snapshot: short dated options remain bid in JPM, largely due to its sectors under-performance and expected volatility surrounding the Fed’s decision on interest rates. Thirty day at the money implied vol in JPM sits at 23.5%, well above its 2015 low just below 15%:

[caption id="attachment_57615" align="aligncenter" width="600"]JPM 1yr chart of 30 day at the money IV from Bloomberg JPM 1yr chart of 30 day at the money IV from Bloomberg[/caption]

If earnings offer little controversy, and the stock were to go up to the mid $60s, short dated options prices should go to the high teens. They’re not likely to see the prior lows as the Oct FOMC meeting should keep them bid.  [private]

Our View:  The volatility in August could have a couple potentially negative implications for a bank such as JPM. First and foremost from their trading desks. Investors will get a clear indication of just how well the bank was positioned for the first real vol shock in years, that wreaked havoc on many of their active trading clients. Additionally, for the balance of Q3, capital market activity saw a marked drop from Q2.  We would be surprised if JPM suffered an unforeseen, out of the ordinary trading loss, but we would not be surprised if results are weaker than unexpected (which is likely priced into shares at current levels) with guidance that reflects uncertainty about the Fed’s plan for interest rates at their next and last two meetings for 2015.

The best trade on the board could be calendars, depending on your directional inclination. Selling weekly options at the implied move, and buying longer dated options of the same strike.

We have expressed a moderately bearish view in XLF puts that we thought were dollar cheap last week with a third of the etf’s components reporting and giving guidance this week (read here).