JPM Analysis

Update 1/19/2016: JPM moved favorably for my trade and I exited for a profit after it attained 51% of its potential profit.

Shares declined by 3.5% over six days, or a -211% annual rate. The options position produced a 102.4% yield on debit for a +6,228% annual rate.

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The financial company JPMorgan Chase & Co. (JPM), headquartered in New York City, publishes earnings on Thursday before the opening bell.

[JPM in Wikipedia]

JPM

I shall use the FEB series of options, which trades for the last time 37 days hence, on Feb. 20.

Ranges

Implied volatility stands at 31%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. JPM’s volatility stands in the 68th percentile of its most recent range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	64.53	70.25	60.88
Lower	53.08	47.35	56.82
Gain/loss	9.7%	19.5%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

JPM has been in a downtrend since Dec. 29 amid expectations of a negative earnings surprise.

Given the negativity of the chart and the chatter, I've chosen to go with a bearish strategy.

Bear call spread, short the $60 calls and long the $62.5 calls,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money

FEB	Strike	OTM
	60	61.8%

The premium is $0.85, which is 34% of the width of the position’s wings. The stock in both analyses was priced at $58.85.

The risk/reward ratio is 1.9:1.

The short-leg strike price is offset $1.15 from the stock price and lies within the upper boundary of the all three post-earnings ranges.

The biggest immediate move after each of the past four earnings announcements was $2.03, and the average was $1.38. The central tendency, with the maximum and minimum move removed, was $1.27.

Decision for My Account

I have opened a position on JPM as described above.

-- Tim Bovee, Portland, Oregon, Jan. 13, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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Disclaimer

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 decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.