This week was an eventful one for equity traders. We saw the markets correct sharply, especially in the last two days. The Nasdaq fell almost 9% off the highs as momentum stocks like Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) were in free fall.
This morning the bulls are taking back some of the prices they lost. Whether they hold it or not is the question going forward. Bank stocks are also rallying this morning but for different reasons. JP Morgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) reported earnings and the stocks are rallying on the headlines.
This is why Wall Street believes that under the leadership of Jamie Dimon, JPM is the cream of the crop.
The higher rates does help but it’s the spread between short and long term rates that they need to increase profits.
Regardless, I am confident that they have the skills they need to do well for the next few years.
Since the high it set on Sept. 21, JP Morgan stock fell 10% into yesterday’s close. So this morning’s pop while comforting is not the sign that it will be able to recapture the highs.
In fact consensus this year has been that the financials cannot hold the rally, and for good reason. Year-to-date JPM is flat. While I am optimistic for bank stocks, I have to agree with the price action. I can’t argue with what I see on the charts regardless of what I think.
I do know that bank stocks are cheap. JPM trades at 13 price-earnings ratio and barely above book value. So owning the shares at a discount from current price is not going to be a financial mistake. I am confident that I will be able to profit from that scenario in the long-term. And therein lies the opportunity.
Although I am encouraged by the positive reaction this morning in JPM stock, I won’t risk my money to buy the shares at face value and hope for profits. Instead I sell downside put option risk into proven support. There I can generate income without any immediate out-of-pocket expense.
The macroeconomic environment is still conducive for higher stock prices. However, we still have a lot of negative rhetoric stemming from the tariff war especially with China.
Furthermore the actual tariffs that we have in place will have a long-term effect if they last. Moreover, the level at which they are taxed will double by January. So the threat is real unless cooler heads prevail from the U.S. and Chinese leaders.
Technically, JPM stock fell this week into a daily pivot zone. These are often support on the way down. But if they fail, then it could retest $90 per share. While this is not a forecast, it is a potential scenario.
JPM Stock Trade Ideas
The Trade: Sell the JPM Jan 2019 $90 put. This is a bullish trade for which I collect $1 to open. I have a 85% certitude that I will retain maximum gains. But if price falls below my strike then I own shares. I would then need to manage off my breakeven point of $89.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the JPM Jan 2019 $92.50/$90 credit put spread, which would deliver over 12% in yield but with much smaller risk.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need JPM stock to hold its support for the next few months. I am betting that the value in the stock will prevent sellers from taking too far. It is important know that if they do, then I want to own the shares at a discount from here.
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Source: Investor Place