Update – JPM Dec Calls: Stop, Spread or Roll?

by Dan October 21, 2019 10:44 am • FREE ACCESS• Trade Ideas• Trade Updates

On October 11th on CNBC’s Options Action program, a laid out a defined risk way to play JP Morgan (JPM) for a technical breakout to new all-time highs prior to December expiration:

On Monday morning October 14th when the stock was $116 I wrote up the trade idea on the site in a post titled Bank Shot:

Break-even on Dec expiration:

Profits above $122.50, up 5.5% from current levels

Losses of up to $2.50 between $120 and $122.50 with a max loss of $2.50 below $120.

Rationale: this trade risks 2.2% of the stock price with a break-even up 5.4% for the next two months with no shortage of potential catalysts. Unfortunately, there are only $5 wide options strikes in Dec because I would probably have been more inclined to do a Dec 118 – 125 call spread which would have likely cost around $2.25, giving me a lower break-even and a higher probability of success.

Over the last week shares of JPM have broken out above the prior all-time high near $120 and while that level served as healthy technical resistance for more than a year and a half, the longer the stock can stay above that level, the stauncher the level should be as technical support. Today the stock is trading at $122.50, and the Dec 120 calls that cost $2.50 last Monday when the stock was $116 are now in the money and worth $5.60.

At this point, it makes sense to consider managing this trade as it is a double in a week from last Monday’s low. I am always in favor of taking half off of am options trade that has doubled in a short period of time and letting the balance ride, One could also roll the Dec 120 calls up, by selling to close the 120s and buying to open a higher strike call… with the stock at $122.50, one could sell to close the Dec 120 call at $5.60 and buy to open the Dec 125 call for $2.65.  This would lock in most of the gain from last week’s trade and allow for further gains in the event that the stock continues to move higher over the next two weeks.

Lastly, one could consider turning the Dec 120 call into a vertical call spread by selling a higher strike call in Dec expiration. For instance with the stock at $122.50, one could sell the Dec 130 call at $1 and own the Dec 120 – 130 call spread for $1.50, which is already $2.50 in the money. This trade has a very favorable risk-reward from here on out, risking $1.50 to possibly make up to $8.50, with a max gain of $8.50 if the stock is $130 or higher, up 9.2% from current levels.