Recently, a congressional committee charged top officials at JPMorgan Chase & Co. (JPM) with misleading investors, regulators and the public at large when they attempted to mask more than $6 billion in losses, which were brought about by souring trades made by the company’s “London Whale” (too bad there were no whale watchers within the firm).
Once the crown jewel of the U.S. banking industry, the firm now finds itself, again, on the defensive with investors who have taken quite a tumultuous washing machine-like ride with its stock price over, nearly, the past two decades.
As can be seen in the chart pattern to the left, JPM’s stock price has been locked in a sideways trading pattern since the middle of September of 1995. Even more disturbing is the waning “on balance volume” that has been observed since the end of July of 2007 (yellow highlight). Even so, the company’s stock price has continued to rise over the past 8 1/2 months (a very discomforting sign).
For those who do not own shares of JPM, initiating a new position now would be unwise. For those who may have gotten onboard at the beginning of the stock’s recent bull run, which began in early June of 2012, taking profits now may be prudent. At the very least, protecting one’s profits with the use of Puts or Covered Calls could turn-out to be a sensible decision.
For those familiar (and comfortable) with options strategies, a protective collar could be initiated at this point to lock-in profits and/or protect against downside losses. As of Friday’s close, a protective collar, using the MAY 13 50 Call and the MAY 13 49 Put could have been initiated for a net credit of $12.00.
An alternative to the trade mentioned above would be to sell the MAY 13 52.50 Call for 0.53 and purchase the MAY 13 48 Put for 0.98 for a net debit of $45.00.
For those unfamiliar with this type of trading strategy it, essentially, acts as an insurance policy to help lock-in current gains and to protect against potential losses. It is a defensive bet, which is to say: This type of position is usually initiated when the investor or trader believes a given stock’s price will begin to decline in value. It works like this:
Option #1:
Sell the MAY 13 50 Call (Covered Call) at the Bid Price of 1.44 (1.44 x 100 shares = 144.00)
Purchase the MAY 13 49.00 Put (Protective Put) at the Ask Price of 1.32 (1.32 x 100 shares = 132.00)
Total Credit: 12.00 (144.00 – 132.00 = 12.00)
Option #2:
Sell the MAY 13 52.50 Call (Covered Call) at the Bid Price of 0.53 (0.53 x 100 shares = 53.00)
Purchase the MAY 13 48.00 Put (Protective Put) at the Ask Price of 0.98 (0.98 x 100 shares = 98.00)
Total Debit: 45.00 (53.00 – 98.00 = – 45.00)
In the first strategy (i.e. Option #1), if JPM’s shares close at a price greater than $50.00 (i.e. 50.01 or greater) on the option’s expiration date of May 17, 2013, then the shares will be “called away” and the 49.00 Put option will expire worthless. If JPM’s shares close at a price lower than 49.00 (i.e. 48.99 or less) on the same expiration date, then the shares will be “put” to the holder of the options contract (i.e. the person from whom you purchased the contract) and the Call option will expire worthless. If, however, on May 17th JPM’s shares close anywhere between $49.00 and $50.00 per share, then both options contracts will expire worthless and the trader/investor will keep his or her shares, while also retaining the $12.00 difference between the two trades.
For Option #2, the mechanics work the same way: If JPM’s stock price closes at a price greater than 52.50 on the expiration date (i.e. May 17th), then the shares will be called away. If they were trading at a price lower than $48.00 per share on the expiration date, then they will be put to the seller of the Put option’s contract. And, if JPM’s shares are trading between a range of $48.00 to $52.50, then the shareholder keeps his or her shares and both contracts expire worthless.
Now, these are but two strategies that can be employed with options; and the level of profits retained (or the extent of losses mitigated) will depend upon the point at which the investor/trader purchased his or her shares (or the total costs basis for those shares covered by the contracts). The point I wish to stress, here, however is that equities traders and investors have “options” when it comes to protecting one’s security holdings. In the case of JPM, it now finds itself bumping-up against a resistance level around $50.00 per share. That observation, coupled with the recent negative press and a host of unknowns surrounding the company’s bad trades, may warrant a defensive posture.
Note: Charts and options information compliments of optionsXpress
