JPMorgan Chase has fallen in recent days on the back of the recent banking crisis involving SVB Financial and Signature Bank.
When a quality company has a big drop like this, I like to use a strategy called a diagonal put spread.
This option strategy is an advanced strategy because it utilizes options over different expiration periods and different strike prices.
Let's look at an example that will do well if JPM stock trades between 110 and 130 on March 31.
The trade I'm looking at is selling a March 31 put with a strike price of 115, and buying an April 14 put with a strike price of 110.
As of Wednesday's close, the March 31 put could be sold for around 1.30. The April 14 put could be bought for 1.55.
Net Cost Of Trade $25, Max Profit Of $275
The net cost on the trade would be $25. And that is the most the trade could lose on the upside.
The risk on the trade is on the downside, with a potential maximum loss of $525. This is calculated by taking the difference in the spread (5) multiplied by 100 and adding in the cost of the trade (25).
The maximum potential gain is around $275, which would occur if JPM stock closes right at 115 on March 31.
The trade has a nice profit zone in between 110 and 130.
Aiming for a return of around 10%-15% makes sense, and I would set a similar stop loss.
The worst-case scenario is a sharp drop in JPM stock early in the trade. For this reason, if the stock drops below 115 in the next few days, I would also consider closing the trade early to minimize losses.
Trade Equal To Owning One JPM Share
The initial trade set up has a delta of +1, meaning the position is roughly equivalent to owning 1 share of JPM stock. Note that this delta number can change significantly as the stock starts to move.
IBD Stock Checkup, JPM stock is ranked No. 1 in its group and has a Composite Rating of 92, an EPS Rating of 88 and a Relative Strength Rating of 74.
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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
