Why the risk/reward didn't align for a JPM put option
Our traders are stalking a lot of different stocks throughout the week, but not every potential trade idea develops into a formal recommendation to our subscribers. Whether it's the break of a key technical level for the shares, an unexpected news announcement, or an unfavorable options pricing environment, this regular feature will shed some light on the factors we view as "deal breakers" to otherwise intriguing trade setups. Today, Schaeffer's Senior Trading Analyst Bryan Sapp chimed in on one stock he was recently toying with -- but ultimately rejected -- for a long put position in Schaeffer's
Weekly Options Countdown service: blue-chip bank stock
JPMorgan Chase & Co. (NYSE:JPM).
What He Liked About JPMorgan Put Options
Specifically, JPM caught Sapp's eye because:
- JPM stock has been making a series of lower highs and lows since peaking in March, and there was a potential bearish head-and-shoulders pattern forming on a daily chart.
- "The security's 50-day moving average provided support for a long time, but is now turning lower and could act as resistance," Sapp said.
- JPM shares were rejected by their year-to-date breakeven level.
- JPM's near-term options were attractively priced. The stock's Schaeffer's Volatility Index (SVI) stood in the 11th percentile of its annual range, pointing to historically low volatility expectations being priced in. Plus, JPM's Schaeffer's Volatility Scorecard (SVS) was at a lofty 95, indicating the stock has made outsized moves on the charts during the past year, relative to what the options market was expecting.
Why He Backed Out of a JPM Trade
However, Sapp ultimately rejected long JPM puts due to the following:
- Despite being negative year-to-date, JPM stock is still up 35% year-over-year.
- JPM is "currently trading slightly off all-time highs, which makes for a tough trade, as you're essentially trying to pick a top," Sapp said.
- There is an open gap around $86, and a good chance this gap is filled, resulting in a short-term bounce for JPM.
- "This seems somewhat counter-intuitive, but I'd much rather short the break of $83 -- the neckline of the head-and-shoulders pattern -- than right here. There's a good chance JPM stock chops around for a bit before showing where it's ultimately headed," he noted.
