Once upon a time, I used to fancy myself a trader that focused on the financials. As a professional, I morphed into other arenas by necessity. The tech space became my darling, After that, it became aerospace and defense that caught my fancy. However, a piece of my heart still looks back at the banks, and sees them in the way an old beau might look at a picture of someone they used to know.
That said, I never completely abandoned the space. I remain long Citigroup (C) , I am flat KeyCorp (KEY) , having managed to maximize that trade earlier this year. Recently, your pal even reloaded his Goldman Sachs (GS) long after having trimmed that position appropriately. That, friends, is based on my belief that volatility will allow this legendary firm to reclaim its reputation. This one, I’ll watch with great anticipation. They report on Tuesday, April 17. My trigger finger itches now.
What if a trader wanted to “play” this Friday’s earnings? I’ve already told you that I am long Citi. That long position is there for strategic reasons, namely the firm’s pledge to return $20 billion to shareholders this year. Nothing playful about that. Know who I haven’t held in a long time, and kind of missed the boat on? JPMorgan Chase (JPM) , that’s who. Hmm.
Citigroup, Goldman Sachs and JPMorgan Chase are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells C, GS and JPM? Learn more now.
Playing JPMorgan Into Earnings
One can see that the name currently trades about two bucks below its 50-day simple moving average, and below where it has traded for most of the year. Technically, the stock has fallen below trend and has seen resistance at the lower bound of its broken Pitchfork model. Relative Strength is mediocre. The daily MACD (moving average convergence divergence) looks poised for some short-term positivity, but Money Flow remains dreadful.
My Trade Idea
Obviously, markets are volatile, and these last sales, or strike prices may have to be adjusted once the bell rings, but to simplify, I am using Monday’s closing prices, and we’ll use minimal lots for the example.
— Purchase 100 shares of JPM at or close to the last sale of $110.40.
— Sale of one $115 January 2019 call at or close to the last sale of $7.00
— Sale of one $90 January 2019 put at or close to the last sale of $2.77.
The trade has the investor laying out the $110.40 for the equity. The trader has also raised $9.77 in revenue, reducing the net basis to $100.63. The trader has limited upside profit in the equity position, as the shares might be called away at $115 in January. The trader has also exposed him or herself to being forced to buy another 100 shares at $90 in eight months if the shares are trading below that price at the time of expiration.
Of course, to avoid that scenario, the trader might also buy back the options positions as time premium withers.
The beauty of this trade is that the stock price would have to drop by nearly ten bucks for the trader to actually net lose money. Even wrong, the trader would still have eight months to be right, all the while the short options positions, in theory, would not lose any value over time other than the difference between the strike prices and the equity last sale. Food for thought.