JPMorgan (JPM) and its $2 billion trade loss will be very hard to understand. It has been reported that losses from the credit derivatives may have been from pricing different than the investment bank had. There are two people involved. We have prices used by JPMorgan's CIO and the company's dealers. The difference in pricing could have been in the hundreds of millions of dollars before it was even seen. But this is not easy to understand. Brad Hintz, a top bank analyst states:
Markets like the OTC Derivatives have many vast grey areas. So different pricing of the same security held in different places at the bank is simply one problem that CFOs fight to ensure clean decision-making by the businesses.
So Chairman and Chief Executive Officer Jamie Dimon agreed to testify on June 13 at a Senate Banking Committee hearing on his bank's $2 billion trading loss. This will drag out through the summer, possibly into the fall, but I have faith in the financial sector. The news sent JP Morgan spiraling down. And it should have. It dropped from around ($43 to $31) in a matter of 10 days.
As the markets reacted negatively toward the stock, it will also be forgiving and eventually forget about the debacle when the economy again starts to turn around. JP Morgan will again rebound as the financial stocks do. With the huge reactionary fall, we have a great opportunity to position ourselves for a rebound income opportunity.
Here I would focus upon a Bull Call Spread. Quick review: A bull call spread is an independent trade that uses a combination of two calls, but is still a single direction strategy. The trader buys a single call contract at any strike price, and then sells a single call contract at a higher strike price (i.e. farther out of the money). The profit comes from the difference in the strike prices of the two calls. If the price moves up a small amount, the long call will go into profit, but the short call will not, and if the price moves up by a large amount, both calls will go into profit.
The Options Play
We want to buy farther into the fall to give the feds enough room to do its investigating before we focus on stock movement.
- Buy September 2012 call with a strike of '34' (priced at $2.31)
- Sell September 2012 call with a strike of '35' (priced at $1.83)
- Net Debit to Start: $0.48
- Maximum Profit: $0.52
Reasoning behind the Trade
- The reaction to the loss dropped the price of the stock so fast, it will rebound. Financial stocks are always resilient at the first signs of economic recovery.