JPMorgan Chase (JPM), for all the wrong reasons, has been in the news lately, having lost $2 billion and perhaps having lost up to $4 billion due to a flawed trading strategy and flawed risk management system. The stock blew up – a very good thing for those looking for some quick cash and income.
The steep decline in the stock has increased volatility and therefore increased the value of calls and puts on JPM. How rich are these premiums? The stock has stabilized yet you can sell a May $35 put – they expire this Friday – and get a 1% return. In less than three trading days you can beat the annual return on a CD.
Is JPM really stable, is it worth the risk of being put the stock? In my opinion, yes.
- First, when you sell a put, you never have to be put a stock. You can buy back the original position if the stock goes against you and sell the same put, or one with a lower strike price, the next week or the next month. JPM has weekly options and is very liquid so you could do this if the stock dips below the strike price of a put you have sold on JPM.
- I am not a big fan of any money center banks, but many investors are, seeing value (I see the next recession coming) and in fairness to banking bulls, U.S. banks are far better capitalized then their brethren around the world. More importantly, the Fed has shown the willingness to step in when needed – unlike European authorities who insist on stepping in after they are needed. The bottom line is that large money center U.S. banks are fairly risk-free from a business perspective, and JPMorgan is the pick of the litter. The quality of management and the size of its capital cushion have dictated how quickly it has acted since blowing itself up.
- Being put the stock at $35 would give you a great asset you could write calls against immediately and this capital would be generating income weekly or monthly. Just because your capital is tied up in a stock you may not have intended to buy does not mean it cannot generate large amounts of income. If you sell calls against JPM shares and actively manage weekly or monthly positions you should be able to generate a15% return per year or more.
The bottom line on JPMorgan: Very good company, a stock temporarily depressed, very rich premiums on the options. Consider selling the May $35 puts or buying the shares at these levels and writing calls $1 to $2 above the current share price.