JPMorgan’s $5.1 million trigger autocall on Morgan Stanley offer absolute return, high premium

By Emma Trincal

New York, Dec. 2 – JPMorgan Chase Financial Co. LLC’s $5.1 million of 0% trigger absolute return autocallable notes due Nov. 25, 2022 linked to the common stock of Morgan Stanley provides a double-digit call premium upon the call with a 30 percentage point range of possible gains on the downside, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus an annual call premium of 13.3% if the shares close at or above the initial share price on any quarterly observation date.

If the notes are not called and the stock finishes at or above the 70% downside threshold, the payout at maturity will be par of $10 plus the absolute value of the return.

Otherwise, investors will be fully exposed to any losses.

Bank bull

“I like it. I’m bullish on brokers right now so I’m pretty confident it will be called,” said Ed Condon, portfolio manager at Bluestone Capital Management.

“Of course, it depends on the client and what they’re trying to do.

“If you’re looking for growth, you would get a levered note or you would buy the stock outright so you wouldn’t give up the upside.”

Not a coupon

The notes are not exactly an income product since the payout is delivered upon the call as a premium, not as a coupon stream which can be collected while holding the notes.

The so-called “snowball” structure allows investors to accumulate the call premium, later making up for missed payments, a feature known as memory.

The product is also not designed to give investors exposure to the stock price appreciation.

“Some clients want a target return. They care more about a decent rate of return than they do about the upside,” said Condon.

“This type of product would be a good fit for those clients.

“They’re better suited for a snowball or a buffered capped note. What they want is a known return rather than growth.”

Higher bar

The 13.3% call premium is relatively high for an underlier that is not overly volatile, the market participant said.

The implied volatility of Morgan Stanley is 36% compared to 22.4% for the S&P 500 index. However, it pales compared to a momentum stock such as Tesla Inc. with an implied volatility of 96.4%.

But since the stock has to be flat or positive on the observation date, the issuer is able to provide a higher return.

“Unlike a Phoenix autocall where you just have to be above a barrier, here the bar is higher. It’s got to be above 100, not 50 or 80. Your premium is going to be higher for that reason,” he said.

The stock carries a 2.26% dividend yield, which is another factor helping pricing.

Cheap option

One particularity of the note was the use of an absolute return feature in this type of product, he noted.

Most absolute return notes, also known as dual directional notes, are structured around a one-to-one (and sometimes leveraged) participation with a cap on the upside; alternatively, digital payouts may also pay the absolute return. But the absolute return is less common in a snowball. And yet, it makes sense, he said.

“The absolute return is expensive to price. But in this case, it’s cheap because your absolute return is conditional upon the notes not getting called. Since it’s unlikely, it’s a cheap put option to price,” he said.

He explained how the absolute return is generated.

“You’re long an at-the-money put with a 70 knock-out. This type of spread normally should be pricey. But you’re not dealing with a normal knock-out put here because it’s a conditional put option. It only works in the absence of a call.

“These are not simple options contracts. The cheap knock-out put and the snowball payout together give the issuer the means to price attractive terms.”

The notes are guaranteed by JPMorgan Chase & Co.

UBS Financial Services Inc. and JPMorgan Financial and JPMorgan Chase & Co. are the agents.

The notes settled on Nov. 25.

The Cusip number is 48132N356.

The fee is 1.5%.

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