JPM Analysis

JPMorgan Chase & Co. (JPM)

Update 1/16/2017; JPM published earnings of $1.07 per share, well below the $1.73 Street estimate. The earnings surprise came after a price rise pre-earnings had carried beyond the upper boundary of the position’s profit zone.

Shares rose by 4.4% over eight days, or a +199% annual rate. The options position produced a 51.1% loss for a -2,355% annual rate.

The decline after earnings were published was insufficient to produce a profit, at the time I exited. I decided to get out because the trend metric remained bullish, suggesting a further push into unprofitable territory.

The interesting aspect of this trade, from my standpoint, is the decision I mad eon Friday to carry the position past the earnings announcement. Like many of my recent trades, I entered JPM more than a week before earnings announcement in order to profit from the pre-earns price movement. The position remained unprofitable on Friday, Jan. 12, the last day to exit before earnings were published.

I made the decision to hold JPM past earnings a day earlier, writing in the Jan. 11 live feed: “It has fallen after each of the last four earnings announcements. The expectation of an upside earnings surprise is very slim. I shall hold this one through the announcement, despite an uptrending Fisher Transform.”

JPM after the announcement indeed behaved as I expected; just not enough. The question, then, is whether it’s better to hold through earnings or get out? The key, I think, is my use of the word “despite”, as in “despite an uptrending Fisher Transform”. If I have one of my major indicators counseling against continuing to hold, I should get out. Period. “Despite” is a word that I should strike from my lexicon in making these decisions.

So despite the loss, I learned something from this trade, and knowledge is always a profitable return.

I have entered a short iron condor spread on JPM, using options that trade for the last time 11 days hence, on Jan. 19. The premium is a $1.35 credit and the stock at the time of entry was priced at $108.36.

I made the decision to enter the trade in my account based on high implied volatility and reasonably close profit-zone coverage of the anticipated downside move.

The profit zone for this position is between $111.35 on the upside and $103.35 on the downside.

JPM publishes earnings on Jan. 12 before the opening bell.

Implied volatility stands at 22%, which is 2.4 times the VIX, a measure of the volatility of the S&P 500 index.

JPM’s IV stands in the 72nd percentile of its annual range and the 73rd percentile of its most recent broad movement.

The price used for analysis was $108.34.

Premium: $1.35 Expire OTM
JPM-iron condor Strike Odds Delta
Long 114.00 91.7% 12
Break-even 111.35 75.0% 25
Short 110.00 66.2% 35
Short 106.00 69.5% 29
Break-even 103.35 85.0% 14
Long 102.00 90.8% 8

The premium is 33.8% of the width of the position’s wings.

The risk/reward ratio is 2:1.

The zone of profit in the proposed trade covers a $1.35 move to the upside and a $2.65 move to the downside. The biggest immediate move after each of the past four earnings announcements was $3.15, and the average was $1.46. After eliminating the maximum and minimum post-earnings movements, the central tendency is $.93.

Over the past four earnings announcements the price has never closed the first post-earns session higher than the pre-earns close.

The break-even probabilities applied to the past four post-earnings moves show a no probability of the price rising while contained within the boundaries of the profit zone and an 85% probability of it falling while remaining profitable

Options analysis puts the expected move covering 85% of occurrences at $2.92, beyond the profit zone in both directions.

The bid/ask spread was 0.74%.

By Tim Bovee, Portland, Oregon, Jan. 8, 2018


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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