JPMorgan Chase is a highly rated stock that has had a nice recovery. But JP Morgan stock could be due for a pause here as the stock sits right between the 21-day exponential moving average and 50-day line.
Traders thinking JP Morgan might move sideways from here could look at a calendar spread. A calendar spread is an income trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Usually, this is done with monthly options, but it can also be done with weekly options. Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
Here's a calendar spread trade on JP Morgan stock. With shares trading around 250, setting up a calendar spread at that price gives the trade a neutral outlook.
JP Morgan Stock: How The Calendar Spread Works
Selling the April 17 call option with a strike price of 250 will generate around $720 in premium, based on recent trading. By buying the May 16 option, a 250 call will cost approximately $990. That results in a net cost for the trade of $270 per spread, and that is the most the trade can lose. The estimated maximum profit is $475, but that could vary depending on changes in implied volatility.
The idea with the trade is that if JP Morgan stock remains around 250 for the next few weeks, the sold option decays faster than the bought option, allowing the trade to close at a profit.
The break-even prices for the trade come in around 238 and 266. But these can also change slightly depending on changes in implied volatility. For this reason, traders consider calendar spreads a more advanced strategy and not recommended for beginners.
For a trade like this, it's best to set a profit target of 30%. Then set a stop-loss if JP Morgan stock breaks through either 238 or 266.
The main risk with the trade is that JP Morgan is due to report earnings on April 11. The options market is pricing in a potential 5.2% move in either direction.
A Neutral Option Strategy
Calendar spreads are a neutral option trading strategy. Bullish traders might consider something simpler like a bull put spread, like this bullish diagonal spread on Amazon.com.
JP Morgan stock ranks number 9 in its group and has a Composite Rating of 94, an Earnings Per Share Rating of 88 and a Relative Strength Rating of 87.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
