Tuesday, April 12, 2011

Options: A Modestly Bearish Pre-Earnings Put Spread on JPMorgan Chase (JPM)

JPM Is down 6/10% at $46.58 in pre-market action.
After the market's reaction to Alcoa (down) and Fastenal (down) earnings, modestly bearish seems like the way to lean when the big bank reports tomorrow.
From Schaeffer's Investment Research (Mon., Apr. 11)
JPMorgan Chase & Co. (JPM - 47.07) will follow fellow Dow component Alcoa Inc. (AA) onto the earnings stage this week. More specifically, the blue-chip banking bigwig is slated to unveil its first-quarter figures bright and early on Wednesday. Historically speaking, the company has exceeded the Street's per-share profit projections in each of the past four quarters, Thomson Reuters reports, though it appears one options trader is betting on a post-earnings pullback for the shares.

Earlier today, a block of 2,000 May 47 puts -- marked "spread" -- traded for the ask price of $1.47 apiece, suggesting they were bought. At the same time, a block of 4,000 May 44 puts -- also tagged "spread" -- traded for the bid price of $0.53 each, implying they were likely sold. In other words, it seems we may have unraveled the makings of a ratio put spread on JPM.

The spread strategist is moderately bearish on JPM, but has a downside target in mind. By writing twice as many 44-strike puts as purchased 47-strike puts, the speculator has trimmed the initial net debit -- and his risk in the event of a post-earnings rally -- to $0.41 per trio of options, but has also limited his maximum profit potential, and added to his risk in the event of a steeper-than-anticipated short-term slide.

More specifically, the best-case scenario for the strategist is for JPM to retreat to exactly the $44 level when May-dated options expire. In this instance, the double-dose of sold puts will expire worthless, while his 47-strike puts will still harbor an intrinsic value of $3 apiece. Subtracting the $0.41 paid to establish the spread, the play would result in a profit of $2.59 per trio of options -- the most the trader can possibly make....MORE, including a detailed look at the trade.