Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
You can access both of our platforms from a single Saxo account.
What are my options - JP Morgan Earnings - Directional Strategies
Koen Hoorelbeke
Options Strategist
Summary: This article discusses two directional strategies, Bullish Debit Call Spread and Bearish Debit Put Spread, for trading JP Morgan's forthcoming earnings results in the context of current low volatility
What are my options - JP Morgan Earnings - Directional Strategies
In my previous post, "What are my options - JP Morgan Earnings", I explored the concept of capitalizing on a 'volatility crush' post-earnings announcement using an Iron Condor strategy. This approach hinges on the build-up of implied volatility leading up to the earnings release.
However, at the time of writing, the IV Rank (a measure of implied volatility over the past year, expressed on a scale of 0 to 100) was actually on a downward trend.
In this article, we'll pivot our focus towards two directional strategies that could be beneficial depending on your perspective on JP Morgan's forthcoming earnings results.
Given the current low volatility, we'll delve into some debit strategies. The principle here is to buy low initially, with the aim of selling at a higher price later on. This is in contrast to credit strategies, where the goal is to sell high initially and then buy back at a lower price later.
When purchasing premium, it's advisable to set your expiry dates a bit further out. This provides your strategy with additional time to evolve in your favor.
It's important to note that the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Depending on your market outlook, the following strategies offer different approaches to navigate the current market conditions:
Bullish Debit Call Spread: If you think the stock will go up in the coming days
This is a Bullish Debit Call Spread on JP Morgan (JPM) with an expiration date of August 18, 2023. Here's a breakdown of the trade:
1. Strategy: A Bullish Debit Call Spread is a bullish strategy that involves buying a call option and selling another call option with a higher strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate rise in the price of the underlying asset.
2. Trade Setup: In this case, the trader is buying to open a call option on JPM with a strike price of $150 and selling to open a call option with a strike price of $155. Both options expire on August 18, 2023.
3. Premium and Risk: The trader is paying a net premium of $1.90 per share (the difference between the mid prices of the two options), for a total cost of $190 (since each contract represents 100 shares). This is also the maximum risk of the trade. The maximum profit is $310, which is the difference between the strike prices ($5) minus the net premium paid ($1.90), multiplied by 100.
4. Breakeven Point: The breakeven point at expiration is $151.90, which is the lower strike price plus the net premium paid.
5. Probability of Profit (POP): The estimated POP is 20.44%. This is a rough estimate of the chance that the trade will be profitable at expiration. Please note that this is a simplification and actual probability may vary based on factors like changes in implied volatility or the price of the underlying asset. The POP is based on the delta.
6. Implied Volatility (IV) Rank: The IV Rank is 11.21, which is relatively low. This means that options on JPM are currently cheaper compared to their historical prices.
7. Days to Expiration (DTE): There are 36 days left until the options expire.
8. Delta and Theta: The position delta is 0.2044, which means the position's value is expected to change by approximately $20.44 for a $1 change in the price of JPM. The position theta is -0.0091, which means the position's value is expected to decrease by approximately $0.91 each day due to time decay, all else being equal.
Remember, while this trade has a potential for profit if JPM rises moderately, it also carries risk. The maximum loss (the premium paid) would occur if JPM is below $150 at expiration. It's important to consider these factors and your own risk tolerance before entering any trade.
Neutral: if you think the stock will stay in it's range
During and shortly after the earnings-announcement: see Tuesday's "What are my options - JP Morgan Earnings".
If you think that the price of JP Morgan will stay range bound, as explained in the article linked above, do make sure that you change the strikes depending on the current stock-price.
Bearish Debit Put Spread: if you think the stock will go down in the coming days
This is a Bearish Debit Put Spread on JP Morgan (JPM) with an expiration date of August 18, 2023. Here's a breakdown of the trade:
1. Strategy: A Bearish Debit Put Spread is a bearish strategy that involves buying a put option and selling another put option with a lower strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate decline in the price of the underlying asset.
2. Trade Setup: In this case, the trader is buying to open a put option on JPM with a strike price of $150 and selling to open a put option with a strike price of $145. Both options expire on August 18, 2023.
3. Premium and Risk: The trader is paying a net premium of $1.93 per share (the difference between the mid prices of the two options), for a total cost of $193 (since each contract represents 100 shares). This is also the maximum risk of the trade. The maximum profit is $307, which is the difference between the strike prices ($5) minus the net premium paid ($1.93), multiplied by 100.
4. Breakeven Point: The breakeven point at expiration is $148.07, which is the higher strike price minus the net premium paid.
5. Probability of Profit (POP): The estimated POP is 20.54%. This is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta.
6. Implied Volatility (IV) Rank: The IV Rank is 11.21, which is relatively low. This means that options on JPM are currently cheaper compared to their historical prices.
7. Days to Expiration (DTE): There are 36 days left until the options expire.
8. Delta and Theta: The position delta is -0.2053, which means the position's value is expected to change by approximately -$20.53 for a $1 change in the price of JPM. The position theta is -0.0037, which means the position's value is expected to decrease by approximately -$0.37 each day due to time decay, all else being equal.
Remember, while this trade has a potential for profit if JPM falls moderately, it also carries risk. The maximum loss (the premium paid) would occur if JPM is above $150 at expiration. It's important to consider these factors and your own risk tolerance before entering any trade.
Latest Market Insights
Quarterly Outlook 2024 Q3
Sandcastle economics
-
-
Bonds: What to do until inflation stabilises
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.
-
Equities: Are we blowing bubbles again
Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.
-
FX: Risk-on currencies to surge against havens
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.
-
Commodities: Energy and grains in focus as metals pause
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.
Disclaimer