JPMorgan’s trigger in-step securities tied to S&P 500 aimed at navigating volatility ahead

By Emma Trincal

New York, Sept. 26 – JPMorgan Chase Financial Co. LLC’s 0% trigger in-step securities due Sept. 30, 2020 linked to the S&P 500 index may act as a hedge for investors who anticipate a correction.

If the final index level is greater than or equal to the downside threshold, 80% of the initial index level, the payout at maturity will be par of $10 plus the greater of 8% and the index return, subject to a maximum return that is expected to be 14% to 17.05% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is less than the downside threshold, investors will have one-to-one exposure to the index’s decline from its initial level.

Preparing for a correction

“I think it’s an interesting note, especially from the standpoint of the two-year tenor since we haven’t had a real correction in the S&P over nine years,” Matt Medeiros, president and chief executive of the Institute for Wealth Management.

“The one at the end of January was very short-lived,” he added, prompting “many of us to expect some sort of correction at some point.”

The notes could be a valuable instrument if the market dropped.

“The depth of the correction is obviously the unknown.

“But having a positive return in a market that might show some sort of a correction would be an interesting play.”

There is significant room for the market to fall and still earn a positive return with a downside threshold offering a 20% contingent protection, he noted.

Not bearish

The notes are designed for investors who need to protect their principal from an impending correction, not from a bear market however. A correction is defined by a drop of at least 10%. Beyond 20%, the downturn becomes officially a bear market.

“You can’t be bearish and buy this note. If you were bearish you would want an absolute return note with a buffer, he said.

“But for someone who expects more volatility ahead and who thinks a correction is on the horizon, this is a reasonable product.”

The maximum return of 14% to 17% was not seen as a drawback, especially for a structure that pays a positive return when the index is negative at least above the barrier.

“I usually don’t like caps. This one is fine because the cap itself is within the range of return expectations for this index, based on average historical stock prices,” he said.

Not bullish

An adviser who buys notes for their potential to beat the market was more skeptical.

“The best probability of outperformance is in that range between -20% and +8%,” he said.

“You have the view that this market is going to be down and you’re willing to cap yourself out.

“Therefore, you’re not that fully bullish. It’s only when the market is down less than 20% and up less than 8% that you’re going to outperform. If it’s between 8% and 17%, you just get the market return. Above 17% you underperform.”

There was nothing wrong with those market views except for how they would play out in a scenario showing a surge in volatility.

Middle ground

“What I find hard to reconcile is that on the one hand you expect volatility to rise sharply enough to potentially push the market down on the edge of a bear market. And yet where you really make your money is in the middle. That’s where you outperform. But if you outperform between -20% and +8%, do you really expect the market to be sideways?

You’re giving up something, which is the upside above the cap just to try to capture some excess return in the middle range.

“With volatility and the way the market moves I have a hard time making a prediction call on this one,” he said.

The notes will be guaranteed by JPMorgan Chase & Co.

UBS Financial Services Inc. and J.P. Morgan Securities LLC are the agents.

The notes will settle on Friday. The Cusip number is 48130V780.

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