This bank stock is losing momentum. How to profit from a pullback using options.
The financial sector broke out of its trading range recently and has been soaring after a stellar round of earnings reports from major financial institutions like JPMorgan Chase, Wells Fargo, BlackRock and Morgan Stanley. However, markets don’t usually move in a straight line. A recent mean reversion trade I shared on Alibaba demonstrated this well when I pointed out that Chinese stocks were due for a pullback. Today, I’m looking at a potential mean reversion trade on JPMorgan (JPM) . In the 9-month daily chart of JPM, I’ve highlighted a sharp decline in the RSI (Relative Strength Index), which signals a loss of upward momentum. Additionally, we’re seeing a potential DMI (Directional Movement Index) crossover, with the DI+ (green line) on the verge of crossing below the DI- (red line). I’ve marked several previous instances of this crossover in the chart, each indicating a trend shift. DMI crossovers like this often provide reliable signals of impending trend changes. I cover many of these setups in my book Mean Reversion Trading . The trade Given the bearish sentiment developing on JPM, I’m opting for a strategy known as a “bear put spread” to potentially capitalize on a pullback. This strategy entails buying a higher strike put and selling a lower strike put, creating a net debit position. For instance, with JPM trading around $220, I’d set up the trade by purchasing a 225 strike put and simultaneously selling a 220 strike put. Here’s the trade setup: Buy 225 strike put (Nov 22 expiry) Sell 220 strike put (Nov 22 expiry) Cost: $250 (limit price 2.50c) If JPM trades at or below $220 on the expiration date, this trade could yield a 100% return on the initial risk. For instance, with 10 contracts, one could risk $2500 to potentially profit $2500. Risks to this trade: This week brings a lot of uncertainty with the upcoming elections, which could inject volatility into the markets. Additionally, the FOMC rate decision is scheduled for Thursday, and as a major market-moving event, it could cause rapid shifts in direction. -Nishant Pant Founder: Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (Nishant currently holds a JPM 225-220 put spread expiring on 11/22.) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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