Breaking News: JP Morgan Trading Loss Rocks Financials

| May 14, 2012 | 0 Comments

Financial InstitutionLast week Jamie Dimon, the CEO of JPMorgan Chase (JPM), revealed the bank had suffered a massive $2 billion loss on a bad trade.  The stunning revelation has shaken investor confidence in JPM and the financial industry as a whole.

No doubt about it, this is a major blunder for JPM and their previously untarnished CEO.

You see, Dimon was widely thought of as the best CEO in the financial industry.  He was the poster boy for how to manage risk at a too-big-to-fail bank.

Now it’s obvious, even Dimon is incapable of managing large portfolios of derivatives.

After listening to Dimon explain how this could happen, it’s apparent financial institutions still operate in a way that allows them to take on more risk than they should.

Put simply, it’s only a matter of time before financial institutions trading derivatives have a trade blow up in their face. 

It begs the question, how many other banks are gambling on derivatives?  And what happens when a trade blows up on them?

Don’t forget, derivatives played a key role in the collapse of the financial industry in 2008.  And not much has changed.  The large money center banks are still using these weapons of mass financial destruction.

As a result, the systemic risk derivatives trading poses to our economy still exists today.  It’s a scary revelation for investors with the 2008 financial crisis still fresh in our minds.

Make no mistake, JPM’s bad trade has turned investor sentiment toward financials from bad to worse.

Frankly, there’s really nothing JPM can do to sway investor sentiment.  In fact, it’s likely to get worse as more details are brought to light.

As negative sentiment builds against JPM, it’s likely to drive the stock even lower in the days and weeks ahead.  And that gives us an opportunity to use options to profit from the continued fall in JPM.

Here’s the thing…

JPM is trading at around $36 per share today.  But it’s still up more than 32% from its 52-week lows around $28.  I think the wave of negative investor sentiment could easily send shares of JPM back to its 52-week low in the next few months.

Take a look at buying the JPM August $33 puts for around $1.50.  If JPM falls back to $28 at the August options expiration, these puts will more than triple in value to $5.00.

Good Investing,

Corey Williams

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Category: Breaking News

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.