Tuesday, July 17, 2012

JPM: Down but not out

I made a trading a mistake yesterday and that I corrected this morning for a 6% gain -- pretty good for an overnight position.

Jamie Diamond, when he was head of JP Morgan Chase & Co. (JPM), made a trading mistake, and the latest estimate of the company's loss is $7 billion, which is about 5% of the banking company's market capitalization.

It's always good to outperform the pros, even if it must credited to fumble-fingers and dumb luck.

JPM's chart fell on bad times last spring, beginning a decline from $46.49 on March 27 that carried all the way down to $30.83 on June 4.

Since then, despite all the congressional storminess over JPM's bad trade, the price has against started moving upward, hitting a leg high of $37.03 on June 21, zagging down to $33.81 -- a higher low -- on July 9, and then rising again to $36.20 -- a lower high -- on July 13.

It has since retraced a bit and is now trading at around $34.88.

The chart is ambiguous, and will be resolved when the price either  bumps above $37.03 or stumbles below $33.81.

Headquartered in New York, JP Morgan Chase is the largest bank in the U.S. by assets and the second-largest by revenues, after Bank of America (BAC). Also, the 52nd largest company in the world.

JP Morgan Chase reports return on equity of 10% with a high level of long-term debt, nearly four times equity, significantly higher than that of competitors Bank of America and Wells Fargo (WFC).

Annual earnings fell tremendously in 2008 as capitalist finance collapsed, and then since recovered, by 75% in 2010 and an additional 13% in 2011.

Quarterly earnings have been inconsistent, without a trend. The company has been profitable for the last 12 quarters, showing 11 upside earnings surprises and one to the downside.

Institutions own 76% of shares and have bid up the the price to more than double sales. It takes $2.17 in shares to control a dollar in sales.

The analyst enthusiasm index for JPM comes in at 25%, unchanged from a month earlier. That's a pretty good level for a company that has been heavily demonized for the past few months, or even years.

JPM on average trades $45.5 million shares a day, which supports a huge selection of option strike prices with very high open interest and very narrow bid/ask spreads.

Implied volatility stands at 31%,k in the lowe rhalf of the six-month range. Volatility fell sharply on July 13 and has since traded near the present lev4el.

Options are pricing in confidence that 68.2% of trades will fall between $31.72 and $38.04.

JPM is trading in the upper section of the five-day fair price range, which runs from $34.02 to $35.33. The range, which is heavily skewed to the upside, contains 68.2% of trades surrounding the most-traded price, $34.19.

JP Morgan Chase next publishes earnings on Oct. 10. The stock goes ex-dividend in October for a quarterly payout yielding 3.44% annualized.

Decision for my account: I would open a bull position on JPM if it were to resume its upward trend -- it has fallen the last two days. I would only do short-term plays -- vertical option spreads, for credit, for example -- rather than anything long term. I also wouldn't be happy doing longer term income options spread, such as a diagonals, because the high dividend makes it more likely that my long call would be assigned.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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