JPMorgan plans to price two Apple-linked notes designed for cautious bulls, agnostic investors

By Emma Trincal

New York, Aug. 17 – JPMorgan Chase Financial Co. LLC is readying two separate offerings linked to the share price of Apple Inc. for moderately bullish investors who want to capture a capped return while securing some downside protection, according to two separate 424B2 filings with the Securities and Exchange Commission.

Both offerings will price this month, and both will be guaranteed by JPMorgan Chase & Co.

The deals are somewhat comparable based on similar terms such as barrier levels, limited upside, identical underlier and not so far apart maturities of two years and three years. Also, both deals will be distributed by Morgan Stanley Wealth Management.

The first offering consists of 0% dual directional trigger Performance Leveraged Upside Securities due Sept. 6, 2018.

On this two-year product, investors get 1.5 times the upside gain up to a 26.15% cap. At maturity, if the share price is greater than or equal to the 80% barrier level but less than the initial share price, the payout will be par plus the absolute value of the stock return. If the final share price is below the barrier level, investors will be fully exposed to the downside from the initial share price.

In the second offering, JPMorgan offers a digital payout of 37% if the final share price is greater than or equal to the initial price. If the final share price is less that the initial share price but above or at the trigger level, 80% of the initial price, the payout will be par. Otherwise, investors will be fully exposed to the downside from the initial share price.

Mildly bullish

“The digital one falls along the lines of getting a high return from any appreciation at all while the leveraged deal is more traditional. ... It’s leverage up to a cap,” a market participant said.

“They’re both capped, and neither one is a bullish play really.

“The digital is the least bullish because you’re taking any gain and pushing it up to that digital return.”

The absolute return feature offered by the leveraged product should in theory offer more appeal.

“But at the end of the day, it really depends on what your view on Apple is,” he said.

“If you’re more ambivalent about Apple, if you’re not sure if it’s going to go up or down but think it’s going to stay within a range, then the absolute return option is the best.”

Growth

The share price of Apple has been volatile this year as the company is facing more pressure from its global competitors for the sale of tablets and smart phones. The stock is up 3.75% for the year, underperforming the S&P 500 index by three percentage points. Investors have turned somewhat less bullish given the company’s slowdown in sales.

Last month, Apple reported a quarterly profit decline of 27% in the fiscal third quarter from a year ago.

“If you’re not expecting a lot of growth, both deals give you a chance to outperform,” said the market participant.

Wall Street has itself lowered its projections on the stock. In June, Goldman Sachs issued a research downgrade, lowering its target price expectation for the stock on the view that the market growth for the iPhone was declining.

An equity analyst said that the technology giant cannot continue to grow at the exponential rate it did as recently as last year and during several years before.

“I don’t have an outlook on Apple. Who knows? Everybody is complaining that iPhone sales are down. But what do you expect? This type of amazing growth we’ve seen can’t go on forever. People have ridiculous expectations,” said Marc Gerstein, research consultant with Portfolio123.

Ulysses

Looking at both upcoming offerings, Gerstein’s reaction was skeptical.

“Whoever did that should dedicate their brains to science for research. Oh my God! Or have lunch with me. We’ll discuss ‘Ulysses’ by James Joyce,” he said.

Ulysses, a work of modern literature, is known to be a difficult, complex read.

Free put

Gerstein said that if he had to pick one of the two notes, he would choose the leveraged one with absolute return.

“I would lean toward that one because of the gains on the downside. It’s a cool way of playing the possibility of a market decline,” he said.

“You can make money if it goes down, and you still make money on the upside.

“It’s a put without having to pay the premium for it. If I could get a free put, I wouldn’t turn it down.”

But Gerstein said that he was not “sold” on the notes.

“It’s based on your market view. It has nothing to do with Apple,” he said.

“I wouldn’t personally take any of them, but it’s fascinating to see the imagination of these guys who create those things.”

The leveraged dual directional deal (Cusip: 46646X720) will price Aug. 31.

The trigger jump, or digital, notes offering (Cusip: 46646X738) will price on Friday.

J.P. Morgan Securities LLC is the agent for both offerings.

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