Financial and bank stocks have been looking a bit stronger within a retracement pattern. For this reason, let's discuss JPMorgan Chase and a potentially lucrative options trade in JPM stock for the longer haul.
Taking in these stocks via a wide-angle lens, the Select Sector SPDR Trust Financial exchange traded fund is in a compression event. The ETF could dip further as the impact of higher interest rates move through the system. Meanwhile, the tone of stock market participants has returned to a mixed-to-bullish level after the large moves of the prior week. But I remain fixed on the monthly formations that show lower highs and lower lows portending a more neutral to negative flow.
Within this complex backdrop, I look for staying power in the financials. Since JPMorgan is the clearing house for the Federal Reserve, along with BlackRock, sustainable price strength after dips will follow JPMorgan.
It is my estimation that the jagged price action will continue. This means proper entry points will become very important within the broad landscape, making the calendar spread once again an ideal choice.
JPM Stock Today
The monthly chart of JPM stock will be the most important one to look at. Why? The calendar will act as our lead for several months.
Meanwhile, IBD Stock Checkup for JPM delivers an excellent overall rating among its peers. With increased reserves and continued performance across its assets, pullbacks are likely to be met with buying pressure over the longer term.
Under the signals that the stock market might continue to take a breather and stocks might grind in a lower range before breaking back north, the use of the calendar spread with a longer duration is suggested today.
Within the option toolbox, view the long calendar spread as a neutral to bullish position. This strategy estimates near-term prices are within a range but will rise over the longer term.
This Is Still The Golden Rule Of Investing
Trade Setup
Let's set up a long calendar spread in JPM stock in the following fashion:
- Sell to open 1 JPM Dec. 15-expiration call with a 145 strike price
- Buy to open 1 JPM March 15 145 call
With this strategy, the total debit of $4.25 per set of contracts means the break-even cost for JPM stock stands at $149.25. That is, take the price of the long option strike plus premium paid. Because the two call options' strikes are separated by time and do not expire at the same time, I will always refer to these as calendar spreads.
What do we want to see in the ideal unfolding of time? We get to a week before expiration, then buy the Dec. 15-expiring 145 calls back. Then, sell the January 145 calls while still holding the March 145 calls. This will reduce the break-even point and increase our profit potential over time.
The goal with this trade? Create a credit that will make the strike in March 'free.' We may receive unlimited upside potential in the stock if the February 145 calls (not yet in the option chains) expire worthless. I put the term 'free' in quotations because the deployment of any capital always involves opportunity cost of some kind.
Defending The Trade
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I also use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
We can also think of the long call calendar spread as a wheel if we choose to roll the option strike forward each month approximately one week before expiration.
Buying a calendar spread surmises price action will be somewhat sideways to up (in our current configuration) in the short term, but will break out to the upside once we get to the strike of the furthest month gets closer to expiration, or in this case in March.
Options sellers are positioned to win in two ways. One, the stock does nothing, or two, the stock moves within the ranges. So we use this concept to minimize the risk of the market exposure.
Trade Management, Key Chart Levels In JPM Stock
The monthly resistance zone sits near 150, and support sits near 140. As a tide determines the lift of the boats, I expect a range within these two prices.
Scenarios for the JPM long call calendar spread to consider:
- JPM stock grinds lower but does not break 140 for more than three days. Plus, the stock shows itself as favorable to traders looking for longer-term growth. We should look for bounces in the days following to confirm chart strength.
- JPMorgan Chase grinds higher but does not break 150 for more than three days. This shows traders are not willing to pay more for the stock at the present time.
- JPM stock breaks out of either of these levels for more than three days. This action breaks our personal risk thresholds for the trade, and we exit the trade. Be patient when we get close to the strikes. Patience will pay off in these formations.
- Stock price holds within the range of our short strike before each prior month's expiration until finally, all we hold is the long March 145 calls. This way we can sell three months' worth of premium. This strategy potentially makes our break-even point in JPM stock well below 145 with unbounded upside. Also, don't fret too much if the short strike goes into the money early in the cycle. Why? We can always roll to higher prices to protect the future investment of the long March strike.
Final Considerations
As with all trades, consider what you like about holding the position in the first place. Consider your risk carefully.
Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades.
