JP Morgan Chase (NYSE: JPM) shares are trading higher after acquisition target Bear Stearns (NYSE: BSC) posted a profit of $110 million, or 86 cents per share, just below analyst projections of 87 cents per share. The results show that BSC was able to make profits during the ongoing credit crisis. Other financial stocks also reporting good news this morning include M&T Bank (NYSE: MTB) and Schwab (NASDAQ: SCHW). This could be a good sign for JPM, which reports earnings tomorrow. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on JPM.
After hitting a one-year high of $53.25 in May, the stock hit a one-year low of $36.01 in March. JPM opened this morning at $42.18. So far today the stock has hit a low of $41.28 and a high of $42.70. As of 12:10, JPM is trading at $41.91, up $0.41 (1.0%). The chart for JPM looks neutral but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $35 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just one month as long as JPM is above $35 at May expiration. JPMorgan would have to fall by more than 16% before we would start to lose money. Learn more about this type of trade here.
JPM hasn't been below $35 at all in the past year and has shown support around $37 recently. This trade could be risky if the company's earnings (due out tomorrow morning) disappoint, but even if that happens, this position could be protected by the support the stock might find around $37, where it bottomed out twice in March.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in JPM, BSC, MTB, or SCHW.
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