JPMorgan Chase has been holding up reasonably well during this correction and is a highly rated stock. So, today's column surveys a bull put spread over a longer time frame than usual in JPM stock.
According to IBD Stock Checkup, JPM stock ranks No. 1 in its group. The megacap bank has a Composite Rating of 97, an EPS Rating of 95 and a Relative Strength Rating of 84.
When it comes to options, we normally look at short-term trades anywhere from one week to one month. In contrast, longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.
As a reminder, a bull put spread is a defined-risk strategy. You always know the worst-case scenario in advance.
JPM Stock Today: The Bull Put Spread Setup
This type of trade will profit if JPM stock trades sideways or higher — and even sometimes if it trades slightly lower.
With JPM stock trading around 144, if we use the March 15, 2024, expiration, then we can sell a 130-strike put option and buy a 125-strike put to set up the bull put spread. That spread was trading around $0.90 per set of options contracts recently.
Selling this spread would generate roughly $90 in premium with a maximum risk of $410. Keep in mind that liquidity is lower in longer-term options. This means it can be harder to get a good fill price.
If the spread expires worthless, that would produce almost a 22% return in five and a half months — provided JPM stock is above 130 at expiration.
Reward Vs. Risk
The maximum loss would occur if JPM stock closes below 125 on March 15. In this case, the trade would see the premium seller lose $410 on the trade.
The break-even point for the trade is 129.10. Calculate this figure as 130 less the $0.90 option premium per contract.
I would set an adjustment point or a stop loss if JPM stock drops below 135. Otherwise, another good rule of thumb? Limit the loss to the amount of premium received. So, in this case you could limit the loss at $90. Sticking to this stop loss level will help avoid large losses if the trade goes south.
Please 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
