JPMorgan’s $2 million jump notes on S&P combine minimum return, lookback, uncapped leverage

By Emma Trincal

New York, Sept. 18 – JPMorgan Chase Financial Co. LLC’s $2 million of 0% autocallable lookback contingent jump buffered return enhanced notes due Nov. 14, 2025 linked to the S&P 500 index caught advisers’ attention due to a series of features, which combined made for an innovative payoff.

The notes will be automatically called at par plus 10% if the index closes at or above the lookback level on Sept. 20, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

The lookback level will be the lowest closing level between Sept. 8 and Sept. 20 and not higher than the strike date level of 4,457.49.

If the index finishes at or above its lookback level, the payout at maturity will be the greater of par plus 1.5 times the return and par plus 20%.

Investors will receive par if the index falls by up to 20%. Otherwise, investors will lose 1% for each 1% decline of the index from its lookback level.

While lookbacks, digitals, uncapped leveraged upside and one-time call payouts are not new features, their combination into one note was noticeable, advisers said. In addition, mixing a digital and leveraged payout at maturity was not common either, they noted.

Lookback

“It’s an interesting note. I like it. At first, it seems a bit complex, but it really isn’t,” said Carl Kunhardt, wealth adviser of Quest Capital Management.

The adviser said he liked the length of the investment.

“Anything three year or less, I’m good with it. The term is fine. In fact, it could be as short as one year if you get called,” he said.

The lookback price did not add uncertainty.

“It’s not a floating price. By Sept. 20, you’ll know what the initial level is going to be,” he said.

The lookback period, however, may be too short to make a significant difference, he said.

“Still, you will lock in the lowest close during those nine trading days, which is a good point,” he said.

Call

The chances of a call after one year were relatively high.

“That may not be good or bad. That just is. If the market is down at that point, nothing happens. You keep going. If it’s up 2%, you get 10%. It’s actually a good deal unless you want to be greedy,” he said.

To be sure, it was impossible to predict whether the upside return would be a call premium, a digital payout or a leveraged gain.

“You’re sort of rolling the dice. But either scenario is attractive,” he said.

Unlimited gains

To “keep going” may be more attractive to bullish investors.

“That’s when your principal is at risk but that’s where you can get the highest return. This note is not designed to be protective. It’s for people who want the upside,” he said.

That’s because the scenario at maturity if the index finished positive would be the most compelling.

“You’re going to get at least 20%. If it’s higher, you get 1.5x no cap. You certainly beat the index,” he said.

Better alternative

On the other hand, the downside protection may be the product’s weak spot.

“You have a 20% protection but it’s a barrier. You would have been better off with a buffer. But again, you either outperform the index or you’re long the index. You’re not worst-of,” he said.

Since any portfolio includes exposure to the S&P 500 index, Kunhardt compared the note with a long position in the benchmark.

“What’ the alternative? If you’re long the index, there’s no leverage, no minimum return, no call premium, no lookback, no downside protection.

“The note is a much better alternative. It’s a no brainer,” he said.

Unusual payoff

Jerry Verseput, president of Veripax Wealth Management, said he had not seen that kind of structure before.

“It’s really interesting. I don’t think I’ve seen any note that gives you either a fixed rate of return or the enhanced return with unlimited gains,” he said.

“One part of the payout is defined, it’s a floor. The other is full leveraged exposure to the upside.”

Most digital payouts cap the upside. Some may offer unlimited returns over the digital strike but on a one-to-one basis, he explained. The use of the leverage with no cap if the index return surpasses the digital level was relatively uncommon.

Verseput compared the payout with a long position in the benchmark.

FOMO risk

“If this note is replacing the S&P, then you’re really taking two risks,” he said.

“First, the index is higher than 10% in one year and you get called at 10%.”

This would be more of a risk to the adviser.

“There will always be people who will complain.

“As advisers keep in mind that the future is unknown. We base our decisions on risk adjusted return. Investors don’t do that. They look backward and when you look backward, there is no risk.”

If for instance the S&P was up 20% a year before, clients would undoubtedly “complain” with 10%.

“But for advisers, 10% is a good risk-adjusted return. You get 10% with a fraction of the risk.

“You can always do better than 10% based on the past.”

Clients may feel they are “missing out” on the upside.

“That’s a risk from an adviser’s standpoint even if it’s a silly risk,” he said.

Dividends, barrier

The second risk was common to all notes: investors have to give up dividends. In this case, the opportunity cost would be limited to 1.5% over two years and two months.

The part of the structure that may need to be improved was the downside.

“That’s where I would probably want to make a change ... Replace the barrier with a buffer. Even a 10% buffer would be better than a 20% barrier because you would outperform regardless. In that case, the worst that can happen is to lose the dividend.

“This is a very nice equity substitute. It gives you the fixed return and the upside in one note,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Thursday.

The Cusip number is 48134AC60.

The fee is 1.35%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.