Investors looking to acquire JPMorgan Chase & Co. (NYSE:JPM) shares at a discount or generate an attractive annual return can explore the strategy of selling cash-secured puts. This approach involves writing put options while setting aside sufficient cash to purchase the stock if needed. In this article, we will delve into the reasons behind trading cash-secured puts, the mechanics of the strategy, and provide an example using JPM stock.
Why Consider Cash-Secured Puts?
Cash-secured puts are a bullish trading strategy, albeit slightly less bullish than owning the stock outright. Investors who are moderately bullish or believe a stock will remain stable, rise slightly, or at least not drop significantly can find this strategy appealing. By selling cash-secured puts, investors demonstrate their willingness to take ownership of the underlying stock if assigned, setting them apart from naked put sellers who merely seek to profit from option premiums.
The degree of bullishness influences where the put strike price should be set relative to the current stock price. Closer strikes generate more premium and higher chances of assignment, while deep out-of-the-money strikes yield smaller premiums and are less likely to result in assignment.
JPM Cash-Secured Put Example
As an illustration, let’s consider JPM trading at $144.46. A December put option with a $140 strike price might be priced at approximately $3.90. Investors selling this put would receive $390 in option premium but commit to buying 100 shares of JPM for $140 each if assigned.
If JPM remains above $140 by the option’s expiration date, the put expires worthless, and the trader keeps the $390 premium. The net capital at risk is the strike price of $140 minus the premium of $3.90, resulting in a net cost basis of $136.10. This represents a 5.79% discount from the previous day’s closing price.
The annualized return on capital, if JPM stays above $140, can be calculated as follows: $390 / $13,610 = 2.87% in 94 days, equivalent to an 11.01% annualized return.
In this scenario, the put seller either achieves an 11.01% annualized return or acquires JPM stock at a 5.79% discount.
Key Company Details
- Technical Opinion: The Barchart Technical Opinion rating for JPM is currently 24% Buy, with the weakest short-term outlook on maintaining the current direction.
- Analyst Ratings: Of the 20 analysts covering JPM, 11 rate it as a Strong Buy, 2 as a Moderate Buy, and 7 as a Hold.
- Implied Volatility: The current implied volatility stands at 21.13%, with a 12-month high of 44.62% and a low of 16.27%. The IV Percentile is 29%, and the IV Rank is 17.11%.
JPMorgan Chase & Co. Overview
JPMorgan Chase & Co. is a global financial services firm with five reportable segments: Consumer and community Banking, Corporate & Investment banking, Commercial Banking, Asset & Wealth Management, and Corporate. The company provides a wide range of financial services to consumers, businesses, institutions, and high-net-worth individuals.
In Summary
While cash-secured puts require a significant capital commitment, they offer an income-generating opportunity for acquiring the stocks you desire. In the event of an assignment, you can also benefit from JPM’s 2.78% dividend yield. Keep in mind that options involve risks, and investors can potentially lose their entire investment. This article serves as educational content and not a trade recommendation. Always conduct thorough due diligence and consult a financial advisor before making investment decisions.
Featured Image: Megapixl
Author Faith Yakubu