JP Morgan (JPM) Yield Enhancement

by riskreversal January 12, 2017 2:09 pm • Trade Ideas

JP Morgan reports Q4 results tomorrow before the open. The options market is implying about a 2.3% one day post earnings move, which is rich to the 4 qtr average one day post earnings move of about 1.9%.

While it has made little sense to try to pick a top in the stock since its parabolic breakout to new highs since the election, the recent stall in the ascent of interest rates and little clarity about financial de-regulation could keep further gains under wraps in the near term as the new administration focuses on getting appointees approved.  While JPM is likely to go to the nice round number of $100 before its all said and done, continued consolidation in the mid $80s could be in order for the time being:

[caption id="attachment_69470" align="aligncenter" width="600"] JPM 2yr chart from Bloomberg[/caption]

As the stock has risen and then consolidated at new all time highs, short dated options prices have remained elevated, with 30 day at the money implied volatility at 22.5% (blue line below), well above realized volatility (white below, how much the stock has been moving), making premium sales appear attractive:

[caption id="attachment_69471" align="aligncenter" width="600"] Bloomberg[/caption]

Long holders might consider over-writing the stock near term to add yield and a small buffer to the downside:

Trade Idea: vs 100 shares long at $86.25 sell 1 Feb 90 call at 96 cents

Profits: have gains of the stock till $90, with the premium sale, the call-away level is 90.96, up 5.5% from current levels in one month. Collect the premium of .96 if the stock closes at or below the $90 level on Feb expiration

Losses: of stock below $86.25, less the 96 cent buffer to the downside.

Rationale: If the stock were to be between current levels and $90 on Feb expiration then the call sale would have added 1.1% yield in a little more than a month, half of the stock’s current annual dividend yield and double the company’s quarterly dividend. Not bad if you annualize that added yield! If the stock goes through that strike it acts like a sell order after a massive move higher in the past few months. If the stock goes lower it adds that yield as a bit of a buffer, but it is not a hedge as the stock could decline alot more than .96 before February expiration.