Option Traders Remain Optimistic on JPMorgan Chase

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Option Traders Remain Optimistic on JPMorgan Chase

After JPMorgan Chase & Co. (JPM) released second-quarter profit results that above expectations, options purchasers are taking measures that indicate they believe the share price will rise in the future. This may come as a surprise given that the JPM share price fell 1.48% on the day the report was released.

Investors had maintained the share price range bound before to the results release, with a substantial quantity of put options in the open interest. The number of option trades suggested that traders were buying puts and selling calls. However, options activity after results suggests that traders believe JPM will continue to rise. This is because price action seems to be maintaining support, but option activity suggests that traders are selling puts and buying calls.

A comparison of stock price movement and option trading activity on the days after results offers some indication that option traders may be cautiously hopeful. Despite the fact that JPM’s share price dipped 1.5% following results, the selling just put prices closer to the firm’s 20-day moving average after the release, but the stock finished far above that level. Furthermore, put option activity has stayed pretty consistent, while call option activity has surged. This is possible because options traders think JPMorgan is cheap at the moment and that the stock price will rise in the short future.

Key Takeaways

  • Traders and investors continued to buy JPMorgan shares after the results report, despite the price falling 1.5%.
  • JPMorgan Chase’s stock price slid closer to its 20-day moving average but ended above it the day following the earnings announcement.
  • Despite the decrease in share price, put and call option activity looks to be positioned for a move upward.
  • Volatility-based support and resistance levels provide for a greater upward mover than a downward mover.
  • This scenario provides traders with a chance to benefit from a reversal in the earnings-based share price decrease.

Because option trading involves the activity of investors seeking to hedge long holdings or speculators seeking to benefit by accurately anticipating unanticipated movement in an underlying stock or index, their selections suggest a projection for the next weeks. This is because option trading is essentially a wager on market probabilities, undertaken by traders who are, on average, more educated than most investors. Understanding the context in which the pricing action occurred is critical to optimizing this understanding. The chart below displays the price activity for JPM’s share price as of Tuesday’s closing, indicating the setup after the earnings announcement.

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Current Trends

Over the duration of the one-month trend, the stock’s share prices have maintained in a broad range. JPM plummeted to $148 per share towards the middle of June and then rose as earnings neared, before dropping about 1.5% on the day of the release and 0.34% the next day. The price settled in the center of the range shown by the technical studies on this chart. The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array serves to emphasize how the price has fluctuated but largely stayed in an average range during the month. This price movement in JPM shares suggests that investors are not optimistic about JPM’s future prospects.

Tip

The ATR has become a widely used measure for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

Based on the price movement for JPM, chartists can see that traders were not anticipating a substantial move higher or downwards leading up to results. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, traders seemed to anticipate that JPM would not move much, either up or down, following results.

Tip

The Keltner Channel indicator shows a series of semi-parallel lines derived from the base of a 20-day simple moving average. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

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Trading Activity

Option traders’ recent activity suggests that they believe JPM shares are cheap and have acquired call options in the hope that the stock would close inside the box illustrated in the chart between now and Aug. 20, the next monthly expiry date for options. The price offered by call option sellers is shown by the green-framed box. It suggests that JPMorgan shares will close inside this range or lower by August 20. As a result, sellers are just modestly optimistic. Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing assumes just a 30% possibility that prices would close above the green box, it suggests that purchasers are ready to accept the long odds.

It is worth noting that over 85,000 call options were exchanged on Wednesday, compared to about 50,000 put options, illustrating the bias that option purchasers had – just 37% of the transactions were put options. This low quantity often indicates that call option traders anticipate a price increase.

The volatility has lessened substantially after results, but the number of put options in open interest remains bigger than the number of calls. This indicates that put options are being sold rather than purchased, resulting in a positive attitude. The call volume vastly outnumbers the put volume for strikes at the money and one step either way. Out-of-the-money put option activity is declining significantly quicker than out-of-the-money call option volume, indicating that more traders expect JPM share prices will rise than those who believe they will fall.

A 10-day Keltner Channel study set at 4 times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months.

The levels marked by the turns are noted in the chart below. What stands out in this chart is how close the call and put prices are, with lots of room to run on either side. This shows that option purchasers are unsure how the corporation will react in the aftermath of the revelation. Despite the fact that investors and option traders did not anticipate significant movement from the report, the share price rose farther than it did after the last earnings announcement.

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These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, a significant shift in either way is probable in the near future. Following the prior results report, JPM shares climbed by less than 1% the next day before beginning to fall the following week. Investors may anticipate a similar little price movement in the week after this release. With so much space in the volatility range, share prices may increase or fall more than anticipated in the short term; but, there is more capacity in the volatility range to support an upward trend.

Market Impact

Because of JPMorgan’s importance in the banking industry, the impact of its earnings release is significant in the market. JPM shares generally change very little following results, therefore the outcome has no direct impact on index prices. However, regardless of what the report says, it is expected to have a substantial influence on financial services companies.

As one of the first large corporations to disclose its quarterly earnings report, JPM helps to set the tone for the market as a whole. The market’s reaction to a reasonably favorable report might have an impact on similarly possibly positive results from other companies in the industry, such as Citigroup Inc. (C), Bank of America Corporation (BAC), or Wells Fargo & Company (WFC).The Financial Sector Index ETF (XLF) of State Street declined 1.1% on the day the report was issued, while the S&P 500 Index ETF (SPY) fell 0.46%.

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