JPMorgan Chase has strong support not far below Tuesday's closing price.
Today, I want to look at a strategy with no risk on the upside and a healthy profit zone on the downside for JPMorgan stock.
The strategy is called a broken wing butterfly, and we'll use puts because the strikes will all below the stock price. This helps to reduce assignment risk.
With a regular butterfly option trade, the wings are placed an equal distance from the short strike. But with a broken wing butterfly we leave a larger gap on a particular side.
This results in less risk on one side and more risk on the opposite side.
The last couple of times we have looked at this strategy on JPM stock, it has worked well.
Setting Up Option Trade On JPMorgan Stock
Let's take a look at how a broken wing butterfly trade might be set up on JPMorgan stock.
- Buy 1 June 21, 165 put @ 1.35
- Sell 2 June 21, 175 put @ 3.25
- Buy 1 June 21, 180 put @ 5.00
Notice that the upper strike put is five points away from the middle put, and the lower put is 10 points away.
This broken wing butterfly trade can be placed for a credit of around $15, which means there is no risk on the upside.
The worst that can happen is all the puts expire worthless leaving the trader with a $15 gain.
On the downside, the maximum loss can be calculated by taking the width between the first two strikes (5) multiplied by 100, less the premium received. That works out to $485.
Maximum Gain On JPMorgan Stock Trade $515
The maximum gain can be calculated as 5 x 100 + 15 = $515.
The ideal scenario for the trade is that JPMorgan stays flat initially and then slowly drifts lower to close around 175 at expiration. The total profit zone is between 170 and 180.
Because the trade starts with delta of 4, it has a slight bullish bias to start.
In terms of risk management, I would set a stop loss of 20% of the capital at risk, or if JPMorgan stock broke below 170.
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 X/Twitter at @OptiontradinIQ
