JP Morgan Chase & Co. (JPM) stock price was down 1.46% yesterday in response to the FOMC meeting and the Fed Chair’s press conference as well as the CPI inflation data. This morning JPM is trending up 150% in social media mentions, and the stock is up in pre-open activity.

From an options trader’s perspective, there is an interesting development in the volatility skew. While expectations are high for tomorrow’s expiration (see page 3), there is a very steep volatility smile in the skew (see page 4.) This abnormal skew lets us create an option buying and selling combination strategy that is direction neutral and has an abnormally high probability of success.

This Volatility Term Structure chart is showing us that volatility expectations and options prices are the highest for the June 14th expiration. To learn more about Volatility Term Structure, click here. When you look at the volatility skew chart on page 4, you will see that the high volatility expectations for tomorrow are presenting an abnormal volatility smile that will let us buy options and sell options in a neutral combination that will give us a probability edge.

This volatility skew chart is showing a pattern called a volatility smile. The unusual thing about this smile is that it is very steep and narrow. Normally when we see a smile the high volatility expectations are deep out-of-the-money. But in the case of JPM today, the high volatility expectations on both sides of the current stock price are very near the at-the-money strike price. With the expensive options so close to the cheaper at-the-money strike price, we can create a strategy by buying cheaper at-the-money options and selling more expensive slightly out-of-the-money options in a neutral trade that has an unusually high probability of success.

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Out-of-the-money JPM options expiring tomorrow have relatively high volatility expectations as investors digest the results of yesterday’s FOMC meeting and the Fed Chair’s comments. Bank stocks like JPM are very sensitive to interest rate policy. 

The elevated volatility expectations of puts and calls that are only slightly out-of-the-money, which is what causes a volatility smile, are creating an unusual opportunity for a high-probability neutral option buying strategy. 

Be sure to read the ODDS Online Daily Trade Idea report to get the details of our trade idea for JPM.

To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.

Thank you,

Don Fishback