JPMorgan's pair of notes linked to Euro Stoxx 50 seen as 'pick-and-choose' marketing strategy

By Emma Trincal

New York, May 21 - JPMorgan Chase & Co.'s two short-dated notes linked to the Euro Stoxx 50 index offer investors comparable structures but distinct ways to express a market view for those hesitating between different ways to be bullish, sources said.

A market participant added that such strategy may be an effective distribution technique for issuers as it gives investors the option to "pick and choose."

In the first structure, JPMorgan plans to price 0% capped return enhanced notes due June 10, 2015 linked to the Euro Stoxx 50, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus double any index gain, subject to a maximum return of at least 22%. The exact cap will be set at pricing. Investors will be fully exposed to any losses.

The final index level will be the average of the index closing levels on the five averaging dates ending June 5, 2015.

The second Euro Stoxx-based deal is JPMorgan's 0% contingent buffered equity notes due Nov. 25, 2015, which gives investors one-to-one uncapped upside exposure to the euro zone benchmark. At maturity, investors benefit from a 17.3% contingent protection. Once that threshold is broken, noteholders are fully exposed to the index decline.

Two Euro Stoxx 50 deals

"It's interesting. Both are on the Euro Stoxx with slightly different flavors," said Joseph Halpern, chief executive officer of Exceeds Investments.

"In the first one, the client says, I don't need the downside protection. I'm willing to take the risk. I'm slightly bullish. The cap is decent, although last year you would have gone through that cap."

The Euro Stoxx 50 gained 26% last year.

In the second deal, investors get the unlimited upside even if they would still "underperform" the benchmark due to the non-payment of dividends, he said.

"But it has a nice protection level. You're not overly worried about the downside risk over the next 18 months since it's only a barrier. But you are a little bit more conservative," he said.

The two deals reflect different market views.

"They're both interesting offers," he said.

"The first one gives you performance enhancement if we have a slight, moderate market move. You think that 22% is enough on the upside. If the Euro Stoxx is up 4% and you get 8%, you're happy with that.

"The other note is a little bit more conservative. You get a 17% barrier instead of nothing. However, if the market is really down, you'll get hurt badly because the protection disappears. So you're not totally risk-averse. But the structure is protective enough in a choppy market as long as things don't turn bad."

Marketing technique

Showing two easy-to-compare structures designed to meet different objectives may be an efficient marketing strategy.

"I've seen pairs like these before offered by the same issuer," Halpern said.

"When there is a lot of money out there available for exposure to a large benchmark, such pair trades can be helpful because they can satisfy different market views. The structure will reflect what your expectation of the market is and you can pick and choose."

The market participant said that "both deals are pretty interesting."

The second deal with unlimited return on the upside may reflect a recent trend among investors who try to stay away from caps, he noted.

"You get the unlimited upside. This no-cap feature makes the deal particularly attractive. That's what bulls are looking for right now," he said.

"It helps to market both of these at the same time. You give clients a chance to clearly see what the possibilities are.

"In the first one, there is no downside protection, but you have the extra leverage and a fairly attractive cap. It's also a bit shorter.

"In the second one, you have unlimited upside, a little bit of protection and a slightly longer term."

Issuers will not create notes with perfect terms on both sides of the deal, he noted.

Showing structures that offer a little bit of everything when combined together may be a strong marketing tool and perhaps may contribute to better educate clients, he noted.

Educational tool

"It's actually more attractive to market them together. The pair helps investors decide what they're more comfortable with," he said.

"It's not done a lot, but it could be done more. I think it's a strong marketing idea, especially when you only have two deals that are easily comparable.

"You don't want to give them too many choices because it's too confusing. But taking two fairly similar deals and positioning them together helps clients answer important questions such as, do I want to buy this protection or would I rather have no cap? These are important questions. Showing those two deals simultaneously may help them determine what matters most to them and which product is the most compelling for them."

Ultimately, investors make a decision when they have a clear market view. The two deals represent a choice between two different views, he said.

"In the first one, the view is that the market is not going to move much. If the index falls, you will lose but not by a lot. If it's up, your upside is amplified. You don't see much risk on the downside and you want to leverage your return," he said.

"In the second one, you expect more of a move and therefore the protection matters to you. This one is based on a greater level of price magnitude.

"Both structures respond to different expectations regarding the market and the magnitude of price moves."

J.P. Morgan Securities LLC is the agent for both offerings, which will price Friday and settle May 29.

The Cusip number is 48127DJU3 for the capped product and 48127DJT6 for the barrier note.

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