JPMorgan’s $4.14 million dual directional notes on S&P are a bet on the speed of a recovery

By Emma Trincal

New York, March 24 – JPMorgan Chase Financial Co. LLC’s $4.14 million of 0% capped dual directional contingent buffered equity notes due March 31, 2021 linked to the S&P 500 index offer a substantial amount of absolute return, which could be timely, advisers said. But the benefit of the downside structure will depend on how fast the current crisis gets resolved and whether a severe recession can be avoided over the next year, they added.

If the index finishes above its initial level, the payout at maturity will be par plus the gain, capped at 10%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes flat or falls by up to 29.92%, payout will be par plus the absolute value of the index return. Otherwise, investors will be fully exposed to the index’s decline from the initial level.

“This is interesting,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“On the downside, I don’t see us going down more than 20% from where we are, so having 30% in absolute return is a positive.”

Investors considering the one-year notes should have a view on how quickly (or slowly) the market may recover, he said.

Pick your scenario

“I would look at it that way: right now, there is a good probability of us going into a recession. That means, the market may not bounce back very quickly. In that case, it’s a good note.”

He described the opposite scenario.

“If this quarantine ends in a couple of weeks, if we come up with a new medication or vaccine, some catalyst, in that case the market would bounce back very strongly.”

Such a scenario would cause stock prices to surge well over 10%, which would penalize investors in the notes.

“10% is a two-day volatility. It’s not a lot in this market. You’re not getting a great upside.”

Plan B

For investors who are more pessimistic or uncertain, the note would make sense.

“There’s a good probability that the market is not going to bounce back that quickly. So, it’s not a terrible note.”

It is hard to predict whether the damage to the economy will be limited as many complex factors are at play, he added.

“While the virus is a serious problem for all of us, in strict economic terms, it’s the shutdown that’s causing major disruptions. It’s the reaction or overreaction to the virus that could generate a serious recession.

“If the shuttering of businesses lasts longer, and it looks like it may, we’re in for a really rough time and it will be hard to restart the economy.”

What’s going to happen is anybody’s guess, he noted.

“But if we go through a severe recession, the note is a way to potentially solve that problem,” he said.

Fibonacci retracement

Jonathan Tiemann, president of Tiemann Investment Advisors, LLC, said the notes’ major appeal was the downside payout although he was not sure the amount of protection may be sufficient for the one-year timeframe.

The cap was a concern but one that could be tolerated as the price to pay for the protection.

“The index could rebound more than 10% from where we are,” he said.

“Even a simple Fibonacci retracement calculation can give us more than 10%.

A Fibonacci retracement is a tool popular with technical analysts and traders, named after an Italian mathematician. It calculates at which point a price will retrace before resuming the trend based on key ratios. The tool is used to predict support and resistance levels.

One of the most used Fibonacci price ratios is 0.618 or approximately 60%, he explained.

“If we’ve been down 35%, 60% of 35%, it’s like 20%,” he said.

“A 10% snapback is half of the 20% of a normal Fibonacci retracement of the recent market decline.”

Investors in the notes should be comfortable with the idea of giving up half of the potential upside if the market recovers within the period, he said.

More losses

More difficult to assess was the value of the nearly 70% barrier.

“You’re selling volatility at a time when volatility is very high,” he said.

The issuer used the premium in large part to offer a nearly 30 points range of positive return on the downside.

“That might not be a bad trade although it’s very possible we could go down another 30% or more,” he said.

“This would be my main concern, especially over such a short period of time.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 48132KKH7) priced on March 13.

The fee is 1%.

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