Trade On JPMorgan’s Earnings News

The market is waiting for JPMorgan Chase (JPM) to announce earnings this Friday. Why?

• The earnings are not the reason the Street is so interested in what CEO Jamie Dimon has to say. The Street is interested in his second-half forecast for the bank, for the sector, for the U.S. economy.
• Traders do not expect any surprises in actual Q2 earnings. This is due to all the news about the busted trade that could cost JPM between $4 billion $8 billion. JPM would have provided some warning on core earnings — somehow — during this crisis. It did not.

Look at options

The bottom line: I believe JPM will announce better-than-expected core earnings and a forecast that mirrors weakening economic data for the U.S. and the world. A muddle.

But the Street is not pricing JPM’s options as if the announcement will be a muddle. Premiums on weekly options are through the roof. The stock is trading north of $34; you can sell a $32 put for 18 cents, a $31 put for a dime. A dime.

Translation: You can sell a $31 put, which would be in the money if the stock declines more than 10%, and get an annualized return of more than 16% on the position. If you would take the risk of either being put the stock or having to roll the puts into a later position, you can sell the $33 puts, and if they expire worthless you would have a 50% annualized gain. If you sold the $34 puts, and they expire worthless, you have a 101% annualized gain.