JPMorgan Stock Today: Bull Put Spread Trade Could Deliver 14.9% Return, But Watch Earnings

As JPMorgan Chase (JPM) prepares to report earnings on Wednesday, investors are eyeing a bull put spread trade that could deliver a 14.9% return. However, the key word here is "watch," as the earnings report could significantly impact the stock's movement. Let's dive into the details of this trade and the factors contributing to the expected range for JPMorgan stock.

The Bull Put Spread Trade

The bull put spread involves selling an at-the-money put and buying a put further out-of-the-money. In this case, selling the Jan. 17, 230-strike put and buying the 225 put would create a bull put spread. This spread is trading for around $0.65, based on recent trading. That means a trader selling this spread would receive $65 in option premium and would have a maximum risk of $435.

If JPMorgan stock remains above 230, the trade loses the full $435. The break-even point for the bull put spread is 229.35, which is calculated as 230 less the $0.65 option premium per contract.

Factors Contributing to the 3.8% Expected Range

The 3.8% expected range for JPMorgan stock's movement is primarily influenced by the options market's pricing, which indicates a 3.8% move in either direction. This pricing reflects the market's anticipation of the stock's volatility around the earnings report. The expected range is calculated based on the at-the-money put and call options for the Jan. 17 expiration.

Benefiting from a Positive Earnings Response

The bull put spread strategy can benefit from a positive earnings response in several ways:

1. Limited Risk and Unlimited Reward: The maximum risk in a bull put spread is limited to the net premium received, while the maximum profit is unlimited. This means that if the stock price moves significantly higher after a positive earnings report, the trade can generate substantial profits.
2. Implied Volatility Decrease: After a positive earnings report, the implied volatility of the options typically decreases. This is because the market has less uncertainty about the stock's future price movement. In a bull put spread, the trader receives the premium, which is a function of implied volatility. As implied volatility decreases, the value of the short put (the one with the higher strike price) decreases more than the value of the long put (the one with the lower strike price). This results in a net gain for the trader.
3. Stock Price Increase: If the earnings report is positive, the stock price is likely to increase. In a bull put spread, the trader wants the stock price to be above the short put's strike price at expiration. A higher stock price means the trade is more likely to be profitable.
4. Time Decay: As the expiration date approaches, the time value of the options decreases. This is known as time decay. In a bull put spread, the time value of the short put decays faster than the time value of the long put, resulting in a net gain for the trader.

JPMorgan's Earnings Report and 2024 Performance

JPMorgan's earnings report is significant for investors as it offers a comprehensive look at the bank's financial performance in 2024, provides insights into the bank's ability to meet or exceed expectations, and updates investors on the bank's strategic plans and outlook for the future. The stock had a fabulous year, greatly outperforming the S&P 500's +25.02% total return, with JPMorgan printing a +43.63% total return and Citigroup returning +41.08%.

In conclusion, the bull put spread trade offers an attractive risk-reward profile, with a potential 14.9% return if JPMorgan stock remains above 230. However, investors must closely monitor the earnings report and be prepared for potential volatility. The earnings report could significantly impact the stock's movement, and a positive response could lead to a stock price increase, benefiting the bull put spread trade.