JPM Q3 Earnings Preview & Trade Ideas

by riskreversal October 13, 2016 11:15 am • Trade Ideas

Event: JP Morgan (JPM) is scheduled to report its Q3 results tomorrow before the open. The options market is implying about a 2.2% one day move in either direction, which is lower than the 4 qtr average one day move of ~2.5%, and shy of the 10 year average of 2.7%.

With the stock trading at $67, the Oct 14th weekly 67 straddle (the call premium + the put premium) is offered at about $1.50 If you bought that, and thus the implied earnings move you would need a rally above $68.50, or below $65.50 by tomorrow’s close to make money.

Price Action / Techncials: JPM is one of the only major global mega-cap bank stocks that is actually up on the year, albeit by just 1.5%.  While the stock is up 27% from the now infamous “Jamie Dimon bottom” from February 11th where he bought $26 million of JPM stock for his personal account in the open market (green below), I’d say more important for the current time is the stock’s rejection earlier this week at the prior 52 week high from last November:

[caption width="600" id="attachment_67096" align="aligncenter"]JPM 1yr chart from Bloomberg JPM 1yr chart from Bloomberg[/caption]Taking a slightly longer term view, and not really important to keep an eye on for this year in my opinion, but the long term uptrend in the high $50s is massive support, with $60 being intermediate term support:

[caption width="600" id="attachment_67097" align="aligncenter"]JPM 5 year chart from Bloomberg JPM 5 year chart from Bloomberg[/caption]So what’s the trade?

Bullish: If I were inclined to play for a breakout to new highs I would consider a call calendar, selling the earnings move to help finance the purchase of longer dated calls in Dec to play for a rate increase in Dec.  But near the money calls that expire look too dollar cheap to sell in my opinion. For instance the Oct 14th 68 calls with the stock at $67 are 30 cent bid. Not a great sale, $1 out of the money,  but if I thought the stock would not rally tomorrow, I would sell those and Buy Dec 67.50 calls for $2.15, resulting in a $1.85 debit. But I suspect there will be a better opportunity in the days/weeks to come for a long entry into Dec.


Bearish: I would target a move over the next week back to $65

JPM ($67) Buy Oct 21st 67/65/63 put fly for 40 cents

-Buy 1 Oct 67 put for 1.05

-Sell 2 Oct 65 puts at 40 cents each or 80 cents total

-Buy 1 Oct 63 put for 15 cents

Break-Even on Oct 21st expiration:

Profits: up to 1.60 between 66.60 and 63.40 with max gain of 1.60 at 65

Losses: up to 40 cents between 66.60 and 67 & between 63.40 and 63, max loss of 40 cents below 63 and above 67

Rationale: risking 40 cents to possibly make 1.60 if the stock retraces 3% to techncial support in a week.

Expectations from Bloomberg:

-3Q adj EPS est. $1.39 (range $1.33-$1.48)
-3Q rev. est. $24.25b (range $24.09b-$24.43b)
-3Q NIM est. 2.26% (range 2.24%-2.33%)
-3Q trading est. $4.52b (Bloomberg survey of 7 ests.)
-FICC est. $3.17b (Bloomberg survey of 7 ests.)
-Equities est. $1.35b (Bloomberg survey of 7 ests.)
-3Q i-banking est. $1.54b (Bloomberg survey of 7 ests.)