Option Trade 
JPMorgan Chase & Co. (NYSE:JPM) Calls
Tuesday, October 10, 2017

** OPTION TRADE: Buy the JPM JAN 19 2018 100.000 CALL at approximately $2.00. Place a pre-determined sell at $4.00.

Also include a protective stop loss of $0.80.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

There will be several reports from big financial firms later this week. Of these, banking behemoth JPMorgan Chase & Co. (NYSE:JPM), which is engaged in investment banking and financial services, is set to deliver one of the most highly anticipated reports before the market opens on Thursday, October 12.

Optimism is rising about the financial-services giant's business, thanks to several positive trends including healthy economic growth, improving credit metrics, and record results out of the commercial-banking business. JPMorgan's operations also stand to benefit if tax reform lowers the corporate tax rate and as the Federal Reserve pushes interest rates higher.

The consensus earnings estimate is $1.67 per share on revenue of $24.99 billion and the Earnings Whisper number is $1.75 per share. Consensus estimates are for year-over-year earnings growth of 5.70% with revenue decreasing by 7.92%.

Corporate & Investment Banking have been one of JPMorgan's weaker units in its most recent quarter, and the challenges are expected to continue. According to consensus estimates, this unit is expected to report net revenues of $8.55 billion, down about 9.5% from $9.45 billion in the prior-year quarter. Last quarter, JPMorgan reported a 3% slump in this unit.

However, JPMorgan should make up for its weaknesses with growth in other divisions. For example, according to consensus estimates, the Consumer & Community Banking unit is expected to report net revenues of $11.69 billion. This result would represent growth of 3.2% year-over-year, which is an improvement over the flat growth witnessed in the most recent quarter.

Also, consensus estimates are currently calling for JPMorgan to report net revenues of $3.23 billion in its Asset Management division, up roughly 6% from $3.05 billion in the year-ago period. Similarly, the company is projected to report net revenues of $2.14 billion in its Commercial Banking division, which would represent year-over-year growth of about 14.7%.

These have been JPMorgan's biggest success stories so far this year. In the previous quarter, the company notched year-over-year growth rates of 9% and 15%, respectively, in these divisions.

J P Morgan Chase & Co has a 50 day moving average price of $92.89 and a 200-day moving average price of $89.53. J P Morgan Chase & Co has a 52-week low of $66.74 and a 52-week high of $97.64. The firm has a market cap of $339.22 billion, a P/E ratio of 14.22 and a beta of 1.18.

Influencing Factors

With global assets worth over $2.5 trillion, JPMorgan Chase & Co. is one of the biggest financial holding companies in the world.

According to data released by the FDIC, JPMorgan Chase topped US banks in retail deposits for the first time in 23 years. JPMorgan Chase’s deposits rose 7.9% in the past year to $1.31 trillion as of June 30, 2017. It surpassed Bank of America, which remained at $1.29 trillion.

The company has supported bottom line growth through streamlining efforts and branch consolidation, and an improved rate environment should offset challenges faced by its persistent fee income growth problem.

It's also worth noting that JPM could seem slightly undervalued compared to its industry right now. For example, its P/E ratio of 14.24 bests the Major Banks industry average of 15.46, and its P/CF ratio of 11.48 are slightly ahead of the industry's 12.33.

The trend of pocketing solid advisory and underwriting fees might have continued in the to-be-reported quarter primarily on the back of higher debt origination. As the interest rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over recent quarters to avoid higher interest rates later. As debt origination fees account for about half of total investment banking fees, this has been leading to strong gains for JPMorgan and the other largest U.S. investment banks.

JPMorgan is making good on its promise to deploy nascent technology throughout its investment bank with the promotion of a former credit trader.

The Wall Street giant has named Samik Chandarana, an 18-year veteran at the bank, as head of analytics and data science for the corporate and investment bank, a newly created position according to an internal memo seen by Business Insider.

JPMorgan, which spent $9.5 billion on technology in 2016, has taken a number of steps to digitize its investment bank, an area of banking that because of its client-facing nature was long thought to be impervious to the technological transformation sweeping much of Wall Street.

Machine learning and AI technologies, at a very basic level, replicate human intellectual capabilities.

Last year, the bank launched a predictive recommendation engine to identify those clients which should issue or sell equity. And now, given the initial success of the engine, it's being rolled out to other areas.

Firm-wide, JPMorgan is upping the ante on tech, according to former COO Matt Zames. 

Analysts and Hedge Funds Opinions

Credit Suisse' Susan Roth Katzke writes that while banks will face some issues, including weaker loan growth and trading, those issues are already baked into expectations, translating into 5% year-over-year earnings per share growth for the group. Beyond the third quarter, she writes that banks' performance will be tied to the macro backdrop, which at the present looks stable, while return on equity could get a boost from regulatory reform.

“We'll continue to assess valuations cognizant of the economic cycle, but equally as willing to embrace the changing operating environment, inclusive of the improved prospects for regulatory reform. All in, our base case estimates translate to 10% year to year EPS growth and a 13.9% ROTCE, on average in 2018—now ~25% above base case.  Looking at a weighted average of our blue sky, base case and gray sky scenarios translates to 10%+ total return in our recommended names—Bank of America (BAC), JPM, Morgan Stanley (MS) and C. We strongly favor the universal banking model, with its multiple levers for growth and greater potential for realization of scale economies.”

J P Morgan Chase & Co ‘s stock had its “buy” rating reaffirmed by stock analysts at Credit Suisse Group in a research report issued on Monday. They currently have a $110.00 price target on the financial services provider’s stock, up from their prior price target of $103.00. Credit Suisse Group’s price objective suggests a potential upside of 13.50% from the stock’s previous close. The analysts noted that the move was a valuation call.

Several other analysts have also recently commented on the company…..

  • Wells Fargo & Company initiated coverage on J P Morgan Chase & Co in a research note on Wednesday, August 9th. They set an “outperform” rating and a $110.00 price objective on the stock.
  • Vetr raised J P Morgan Chase & Co from a “hold” rating to a “buy” rating and set a $93.14 price objective on the stock in a research note on Wednesday, September 6th.
  • Zacks Investment Research raised J P Morgan Chase & Co from a “hold” rating to a “buy” rating and set a $103.00 price objective on the stock in a research note on Tuesday, July 18th.
  • Jefferies Group LLC reaffirmed a “buy” rating and set a $102.00 price objective on shares of J P Morgan Chase & Co in a research note on Friday, September 15th.
  • Finally, Oppenheimer Holdings, Inc. reaffirmed a “market perform” rating on shares of J P Morgan Chase & Co in a research note on Friday, July 21st.

Three investment analysts have rated the stock with a sell rating, fifteen have issued a hold rating and seventeen have assigned a buy rating to the stock. The company currently has an average rating of “Hold” and an average target price of $98.87.

Several institutional investors have recently made changes to their positions in the stock, to name a few….

  • Shell Asset Management Co. lifted its stake in J P Morgan Chase & Co by 34.6% during the 2nd quarter, according to its most recent 13F filing with the Securities & Exchange Commission. The fund owned 444,972 shares of the financial services provider’s stock after purchasing an additional 114,382 shares during the period. Shell Asset Management Co.’s holdings in J P Morgan Chase & Co were worth $40,670,000 as of its most recent SEC filing.
  • BSW Wealth Partners boosted its position in shares of J P Morgan Chase & Co by 0.5% in the 1st quarter. BSW Wealth Partners now owns 4,889 shares of the financial services provider’s stock worth $429,000 after purchasing an additional 26 shares during the last quarter.
  • Financial Advisory Service Inc. raised its stake in J P Morgan Chase & Co by 0.7% during the 1st quarter. Financial Advisory Service Inc. now owns 5,028 shares of the financial services provider’s stock worth $442,000 after buying an additional 36 shares during the period. Keel Point LLC raised its stake in J P Morgan Chase & Co by 1.1% during the 1st quarter.

Harvey’s Options Volatility Indicator


While the momentum in investment banking business is likely to continue, growth in commercial and industrial loans as well as consumer lending should lend support to revenues.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the JPM JAN 19 2018 100.000 CALL at approximately $2.00. Place a pre-determined sell at $4.00.

Also include a protective stop loss of $0.80.

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