JPMorgan Chase & Co. (NASDAQ: JPM) covered call

JPMorgan Chase & Co. (NYSE: JPM) investors might view the banking giant’s decision to pay a dividend as bullish. The bank’s stock has risen 17.5% throughout the last six weeks, and though the company is looking stronger fundamentally, this movement, in the near-term, might be a bit excessive in relation to how the stock has traded in the past.

More News On JPM

• JPM

• New York Fed: Toxic assets from AIG gaining value
  July 29, 2010
• Judge allows some to see critical Tribune report
  July 29, 2010
• Sector Update: Financial
  July 29, 2010

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While the long-term view remains strong, the Idea Generating Platform (IGP) has found a covered call for you to examine if you are currently long the stock. The risk/reward profile will be shown as a buy-write, but remember that your cost basis in the stock must be considered before executing the trade.

JPM Covered Call Trade Details:

JPM is currently trading at $43.29, down roughly 0.8% so far today.

Covered Call –

• Sell the April 44 call (out-of-the-money) for $1.10 per contract (or better).
• Buy 100 shares of stock for every sold call (current price for 100 shares is $4,329).

A free virtual trading account can help you visualize the maximum profit, maximum loss, and breakeven level for this covered call trade.

Profit/Loss Details:

Maximum potential profit:, if assigned, is $1.81. Return on risk is approximately 4.3%.

Maximum risk: $42.19 (the stock price at the time of purchase minus the credit).

Breakeven: $42.19 (the stock price at the time of purchase minus the credit).

A covered call has essentially three possibilities:

1. The stock can stay flat, leaving the out-of-the-money call to expire worthless. The investor keeps the premium and gains nothing on the purchased shares.

 

2. The stock can decline, at which point the option again expires worthless and the investor keeps the premium but takes a loss on the stock. In scenarios one and two, the covered call outperforms the stock side of the trade.

 

3. If JPM moves above the 44-strike between now and April expiration (in 29 trading days), the option will likely be exercised, capping the stock’s upside.

Ready to start trading? Sign up for ONN.tv’s premium trading alert service and follow experts Jud Pyle, Kevin Cook and Jared Levy as they actively manage weekly option trades. You can also open your own account and start trading with 100 commission-free trades.

For more on JPM:

Betting on a breakout in JPMorgan (NYSE: JPM)

Bullish and bearish option strategies in JPMorgan Chase (NYSE: JPM)

Remember, trading Ideas are generated by the ONN Idea Generating Platform as a starting point for people to begin their own research. Trading ideas are not intended as trading or investment advice or recommendations that any particular security or strategy may be suitable for any specific person. You are solely responsible for your investment decisions, but we hope that some of these ideas will give you a starting point as you look for strategies to employ.