JPMorgan Chase is due to report earnings on Wednesday before the market open. Today's column presents a bull put spread trade in JPMorgan stock.
The options market is pricing in a 3.8% move in either direction. So, let's analyze how we can structure an option trade that fits the view that 1) we think JPMorgan stock will stay within the expected range and 2) the response to the earnings report is likely to be positive.
Taking the at-the-money put and call for the Jan. 17 expiration, we can see that the expected range is 3.8%. Now that we know the expected range, let's find a bull put spread that has a break-even price roughly 3.8% below the stock price.
JPMorgan Stock Today: The Trade
Selling the Jan. 17, 230-strike put and buying the 225 put would create a bull put spread.
This spread is trading for around $0.65, based on recent trading. That means a trader selling this spread would receive $65 in option premium and would have a maximum risk of $435.
That represents a 14.9% return on risk between now and the end of the week if JPMorgan stock remains above 230.
If JPMorgan stock closes below 225 on the expiration date, the trade loses the full $435.
The break-even point for the bull put spread is 229.35, which is calculated as 230 less the 0.65 option premium per contract.
Risk And Reward
There is little room for adjustment with short-term trades such as this held over earnings.
A 14.9% return in a few days would be nice, but the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high risk tolerance and a bullish outlook for the stock.
According to IBD Stock Checkup, JPMorgan stock is ranked seventh in its group and has a IBD Composite Rating of 89, an EPS Rating of 72, 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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
