JPMorgan’s dual directional review notes tied to S&P GSCI Crude target contrarian investors

By Emma Trincal

New York, Dec. 10 – JPMorgan Chase & Co.’s 0% dual directional buffered review notes due Jan. 20, 2016 linked to the S&P GSCI Crude Oil Index Excess Return offer returns in both up and down markets as long as oil prices remain contained in a range, sources said.

Given the plunging prices and high volatility of the commodity, the band in which investors may profit is unusually wide and the premium relatively high, making the product attractive to risk-takers, sources noted.

The notes will be called at par plus an annualized call premium of 18.6% if the index closes at or above the initial level on any of four quarterly review dates, according to an FWP filing with the Securities and Exchange Commission.

If the notes are not called and the index falls by up to the contingent buffer of 20%, the payout at maturity will be par plus the absolute value of the return.

If the index finishes below the 80% barrier level, investors will be fully exposed to the index decline.

Oil bear market

The index, which tracks the price of crude oil, has dropped by nearly a third in the past three months.

Crude oil futures traded at about $61 a barrel on Wednesday, a 40% decline since their peak in June.

“If you believe that we’re hitting bottom and that prices will stabilize over the next year, this is a good way to get more than 18% in return even if the market stays where it is at right now,” a market participant said.

“You get called in three months and you make nearly 5%. Not a bad premium.

“You can also be slightly bearish up to a point. If you don’t see oil prices falling by more than 20% a year from now, you can capitalize on the downside as well given the absolute return feature.”

Some among the ultra bears have called for oil down to $20 a barrel, he said. But the consensus sees a bottom more around $50 or at the worst, $40, he added.

Range bound, wide range

“If you don’t expect oil to fall below the $50 threshold, then this is an attractive play. No need to expect a huge turnaround. You can see prices staying flat or declining up to a 20% limit. It’s a range bound trade but with a generous range on the downside,” he said.

The high volatility seen in oil prices helps with pricing, he said, giving more premium for volatility sellers.

“That’s how they’re able to price quite a wide range of absolute return. Twenty percent is pretty wide considering that it’s a 13-month note,” he said.

“For someone with a strong conviction that oil may fall further but not dramatically further and that it may actually recover somehow, this is a good bet.

“It gives you a higher probability of getting a positive return.

“It’s not the right structure for those who expect prices to plunge even more or to shoot up. But it’s a decent way to capitalize on both sides of the trade if the moves remain contained.”

Wild ride

The old adage that money is made when there is “blood on the Street” applies to this note, an industry source said.

“I like it. The 18.6% premium is very attractive,” he said.

“This is really a reflection of your view on oil. I am a huge fan of oil trade.

“Oil prices have collapsed. At some point, you will see a reversal to the mean. The question is whether it will happen in the next year or not.

“This is a great trade if you are a contrarian investor with a solid tolerance for risk.

“You’re taking advantage of the volatility value as you’re selling it.

“Being able to get paid regardless of the market direction is very attractive, too, especially after such a severe correction,” he said.

J.P. Morgan Securities LLC is the agent.

The notes will price on Dec. 12 and settle on Dec. 17.

The Cusip number is 48127DPN2.

The final index level will be the average of the closing index levels on the five trading days ending Jan. 14, 2016.

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