JPMorgan Chase is holding up well while tech stocks have pulled back in recent days.
Today, I'm looking at 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 is trading between 133 and 142 on June 23.
The trade I'm looking at is selling a June 23 put with a strike price of 136 and buying a July 7 put with a strike price of 134.
As of Wednesday's close, the June 23 put could be sold for around 0.70 and the July 7 put could be bought for 1.00.
JPM Stock Trade Risks Only $30
The net cost on the trade would be $30, and that is the most the trade could lose on the upside.
The risk with this trade is on the downside, with a potential maximum loss of $230. This is calculated by taking the difference in the spread (2) multiplied by 100 and adding in the cost of the trade (30).
The maximum potential gain is around $140, which would occur if JPM stock closes right at 136 on June 23.
The trade has a nice profit zone in between 133 and 142.
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 136 in the next few days, I would also consider closing the trade early to minimize losses.
JPM Stock Trade Equals To Shorting Six Shares
The initial trade set up has a delta of -6. That means the position is roughly equivalent to being short six shares of JPM stock. Note that this delta number can change as the stock starts to move.
According to the IBD Stock Checkup, JPM stock is ranked No. 1 in its industry group. It has a Composite Rating of 95, an EPS Rating of 92 and a Relative Strength Rating of 80.
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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
