JPMorgan Chase has strong support at 152.50, not far below Monday's closing price.
Today, I want to look at a strategy on JPM stock with no risk on the upside and a healthy profit zone on the downside.
The strategy is called a broken wing butterfly. We'll use puts because the strikes will all be below the stock price. This helps to reduce assignment risk.
With a regular butterfly option trade, the wings are placed an equal distance from the short strike. But with a broken wing butterfly, we leave a larger gap on a particular side.
This results in less risk on one side and more risk on the opposite side.
The last couple of times we have looked at this strategy on JPM stock it has worked well.
Breaking Down Trade On JPM Stock
Let's take a look at how a broken wing butterfly trade might be set up on JPMorgan stock, which was discussed in Monday's IBD 50 Stocks To Watch.
- Buy 1 Sept. 15, 135 put at 0.20
- Sell 2 Sept. 15, 145 puts at 0.75
- Buy 1 Sept. 15, 150 put at 1.55
Notice that the upper strike put is five points away from the middle put, and the lower put is 10 points away.
This broken wing butterfly trade will cost around $25, which is the most the trade can lose on the upside.
Worst Case Scenario: A $25 Loss
The worst that can happen is all the puts expire worthless leaving the trader with a $25 loss.
On the downside, the maximum loss can be calculated by taking the width between the first two strikes (5) multiplied by 100, plus the premium received. That gives us 5 x 100 + 25 = $525.
The maximum gain can be calculated as 5 x 100-25 = $475.
The ideal scenario for the trade is that JPM stock stays flat initially and then slowly drifts lower to close around 145 at expiration. The total profit zone is between 140 and 150.
Because the trade starts with delta of -3, it has a slight bearish bias to start.
In terms of risk management, I would set a stop loss of 20% of the capital at risk, or if JPM stock broke below 140.
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It's important to 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 Twitter at @OptiontradinIQ
