JPMorgan’s dual directional buffered notes tied to S&P 500 designed for ‘neutral bullish’ play

By Emma Trincal

New York, Sept. 16 – JPMorgan Chase & Co.’s 0% capped dual directional contingent buffered return enhanced notes due Sept. 30, 2019 linked to the S&P 500 index offer investors the potential to gain in both rising and falling markets within a reasonable range, sources said.

The payout at maturity will be par plus 1.15 times any index gain, capped at 60%. If the index falls by up to 30%, the payout will be par plus the absolute value of the index return. If the index falls by more than 30%, investors will be fully exposed to the index decline, according to an FWP filing with the Securities and Exchange Commission.

Non-directional

“Seems pretty good to me. ... For a slightly bullish investor, it’s actually quite good,” an industry source said.

“Even though you can also make money on a down market, I wouldn’t say it’s bearish. I see it more like a neutral bullish play. The investor is optimistic, but still he wants to be able to make money if he’s wrong.”

Dual directional notes are designed for investors neutral about the direction of the market.

The JPMorgan notes have a more bullish bias as there is twice more return potential on the upside than on the downside.

A structurer said that there is nothing surprising about this asymmetry. He was referring to the 60% range below the cap on the upside and the 30% contingent buffer amount on the downside.

Fine-tuning the barrier

“It’s what those dual directional [notes] are designed to do: you make money on the way up, and you make money on the way down,” this structurer said.

“Here, you make more on the way up. That’s normal. Most investors are bullish.

“These things aren’t always symmetrical. It depends on the pricing.

“Let’s assume they start with a 50% barrier as an example. It’s so deep the cap would be too low. Then you run into the problem of not being able to sell it.

“It’s a step-by-step process. You raise the barrier to make the structure cheaper. It’s cheaper because it’s easier to lose money when the barrier is higher, so now you can raise the cap. At that point, the cap may be attractive, but the barrier may not be protective enough.

“You have to find the middle ground. They probably found that a 70% barrier with a 60% cap was an acceptable middle ground.”

Not a long bet

The structurer said that sometimes investors look at those products and compare with to a direct investment in the index.

Those investors sometimes raise the issue of not getting paid the dividends through a structured note. With the notes, investors would have to forego 2% of dividends each year for four years.

“You can’t look at it that way,” he said.

“You can’t just say, I’m capped, I don’t get the dividends, and I don’t have a lot of leverage. You also have 30% worth of protection on the downside, and you have participation on the downside. For the first 30% losses in the index, you’re going to make money on a one-to-one basis.

“It’s really impossible to compare this with a long-only investment. There are too many things going on.

“If the S&P drops 30%, you can’t make 30% if you’re long the index.”

J.P. Morgan Securities LLC is the agent.

The notes are expected to price Sept. 25 and settle Sept. 30.

The Cusip number is 48125UW73.

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