How to Play a Straddle Strategy on JPMorgan's Earnings?
$JPMorgan Chase(JPM)$ is scheduled to report earnings before the market opens (BMO) on Wednesday, marking the start of a series of earnings reports as the largest U.S. financial institution wraps up the 2024 fiscal year.
Analysts are optimistic about the banking giant, with 8 out of 14 analysts tracked by Visible Alpha giving it a “Buy” rating, and the remaining 6 assigning a “Hold” rating. The average price target is $256.50, suggesting analysts expect JPMorgan’s stock to rise this year, potentially revisiting and exceeding the record levels set in November. The stock closed around $240 on Friday.
JPMorgan is expected to report quarterly net income of $11.92 billion, up nearly 30% year-over-year, and revenue of $41.49 billion, a 7.5% increase from the same period last year.
However, the bank’s net interest income (NII) is projected to decline from $24.05 billion a year ago to $22.93 billion, as the bank will feel the impact of higher deposit costs in the upcoming quarter before lower rates help reduce deposit costs.
As the largest U.S. bank, JPMorgan has consistently outperformed expectations in the first three quarters of this fiscal year.
In the first quarter, despite NII missing estimates, revenue and profit continued to beat expectations, driven by surging asset management and investment banking income.
Market observers will also focus on comments from JPMorgan CEO Jamie Dimon regarding the bank’s succession plans, guidance for the next fiscal year, and his economic outlook for Donald Trump’s second presidential term.
JPMorgan Earnings Volatility Analysis
JPMorgan (JPM) is set to release its earnings before the market opens (BMO) on January 15, 2025.
Over the past 12 earnings quarters, the options market has overestimated JPM stock's earnings volatility 67% of the time. While the average predicted move after earnings was ±3.2%, the actual average movement (absolute value) was 3.3%. This indicates that JPM stock’s post-earnings price moves often exceed the options market’s expectations.
In the previous earnings cycle, implied volatility (IV30) for JPMorgan was 27.0% before earnings. After the earnings release, IV fell to 23.3%, resulting in a 14% implied volatility crush (IV crush). Within five days after the report, the 30-day implied volatility dropped further to 21.1%.
What Is a Straddle Strategy?
Long Straddle: Investors simultaneously purchase an out-of-the-money (OTM) call option and an OTM put option. The call option’s strike price is above the current market price of the underlying asset, while the put option’s strike price is below it. This strategy offers significant profit potential, as the call option theoretically has unlimited upside if the underlying price rises, and the put option benefits if the price falls. Risk is limited to the premiums paid for both options.
Short Straddle: Investors sell both an OTM put and an OTM call option. This is a neutral strategy with limited profit potential, aiming to profit from a narrow trading range of the underlying stock. Maximum profit is equal to the total premiums collected minus transaction costs.
Short Straddle Strategy Example on JPMorgan
Current stock price: $245
Sell a call option with a strike price of $255 for a premium of $100.
Sell a put option with a strike price of $232.5 for a premium of $101.
Total premium collected: $100 + $101 = $201
Profit and Loss Analysis
Maximum Profit
Occurs if JPMorgan closes between $232.5 and $255 at expiration, with both options expiring worthless.
Maximum profit = Total premium collected = $201
Maximum Loss
Downside risk: If the stock price falls below $232.5, the put option will be exercised.Theoretical downside risk is unlimited as the stock price could approach $0.
Upside risk: If the stock price rises above $255, the call option will be exercised. Theoretical upside risk is also unlimited as the stock price could rise indefinitely.
Breakeven Points
Lower breakeven point: 232.5−2.01=230.49
Upper breakeven point: 255+2.01=257.01
Profit Zone: $230.49 ≤ Stock Price ≤ $257.01
This short straddle strategy is ideal if you expect JPMorgan's stock price to stay within a narrow range after earnings. However, the strategy carries unlimited risk if the stock price moves significantly beyond the breakeven points.
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