JPMorgan Chase & Co. (JPM), Trending Stock Report

JPMorgan Chase & Co. (JPM) is in the news after executives labeled analysts expectations as “a bit too optimistic.” Social media mentions are up 700% in the last 24 hours and the stock dropped nearly 6% yesterday.

We’ve seen investors overreact to bad news on JPM in the past. For example, if we look at put spreads with strikes more than 9% out of the money during the 2022 bear market, we can quickly count how often the stock fell 9% in four trading days in a bear market scenario. It only happened 2% of the time. Looking at the option deltas, which provide a rough estimate of expected probability, we can calculate that options traders are pricing an 11% chance that JPM shares will drop 9% below Monday’s close. That’s five times higher than what happened when inflation was running rampant, and the Fed was hiking rates.

When we see the history and the current expectations, it’s clear that the options are mispriced. It shouldn’t be a surprise that JPM guided down its interest income expectations if the Fed cuts interest rates, which is widely expected to happen next week. It looks as though investors are overreacting not only by pushing the stock down, but also by pushing up the prices on put options. We have a strategy for this situation.

This Volatility Term Structure chart for JPM shows us the implied volatility for the at-the-money options for each expiration. The volatility expectations for the September 13^th expiration are the highest. High volatility expectations means options are also priced high… too high, relative to past stock behavior. This gives us an option selling opportunity.

This MDM graph compares the modeled expected distribution for future stock prices (the orange line) with the actual distribution of the stock’s prices over the past year (the blue histogram). You can see that the actual stock movement shows that the stock does not make moves as large as the current options prices are expecting. This graph tells us that the options expiring Friday are mispriced.

JPM stock dropped nearly 6% yesterday and investors are pricing in an 11% probability of a 9% drop in 4 days (Monday’s close to Friday’s close). Historically, even when the Fed was hiking rates and inflation was running rampant, a drop of that magnitude only happened 2% of the time.

This is a high-probability option selling opportunity. We prefer to use put credit spreads in this situation to limit our risk.

To get the specific details and prices on today’s trade idea, be sure to read today’s ODDS Online Daily Option Trade Idea.