JPMorgan’s $1 million capped dual directional buffered notes on S&P aimed at bears

By Emma Trincal

New York, June 16 – JPMorgan Chase Financial Co. LLC’s $1 million of 0% capped dual directional buffered equity notes due June 27, 2023 linked to the S&P 500 index may allow investors to outperform on both directions of the market, but the advantage is given to the bears, advisers said.

If the index gains, the payout will be par plus the index return capped at 8%, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par plus the absolute value of the index return if the index declines by no more than 20%.

Otherwise, investors will lose 1.25% for every 1% that the index declines beyond the buffer.

8% cap

“It’s already down 9% since they priced it,” said Steve Doucette, financial adviser at Proctor Financial.

The underlying closed at 4,017.82 on the strike date and at 3,667.24 on Thursday.

“You’re capped at 8% on the upside on a one-year note. That’s not much. On the other hand, if the market is down, you outperform tremendously. If you hit it perfectly, down 40%, you outperform by 80 percentage points. That’s a big win,” he said.

If the index finished positive, investors would automatically receive 8%, he noted, adding that the potential gain on the upside was much lower than on the downside.

“It’s got a bearish bias and you’re capped at 8%. Not sure it’s enough,” he said.

Doucette’s main concern was the risk of missing a significant amount of the upside in the event of a strong recovery rally.

Shortest bear

“Since the bear market of March 2020 that lasted about a month, we don’t know how long a bear market can last.”

Between Feb. 19 and March 23 of 2020, the S&P 500 index dropped 33.9%. It was the shortest bear market in history since 1929, according to S&P Dow Jones Indices.

“It was bad but short. Soon after we got a huge rebound,” he said.

Within six months, the market had regained its pre-crash peak level of February.

“Six months to recover. After that, the S&P was off to the races.”

During the year following the February high, the S&P 500 index had gained more than 15% despite the 33.9% drawdown at the beginning of the period.

“If the pattern repeats itself, you could be missing some of the upside. We’re already down 23%. We could be down a little further, but when a bear market ends, the trend is usually very bullish. So, the risk is clearly on the upside,” he said.

Bear play

For bearish investors however, the note was an adequate play.

“You do have to be bearish if you buy this note. Your best-case scenario is this absolute return. If you’re down 20%, that’s the sweet spot.”

But Doucette said he has always been skeptical about absolute return payouts.

“I usually don’t benefit from it. What are the odds that you’re going to fall within that range and get paid? It’s pretty unlikely in my view.

“One thing I do like though, is the buffer. I have no issue with geared buffers. You would need a drastic decline in the index to wear out this buffer,” he said.

Doucette was doubtful about the value of the notes.

“It’s a tough call. Unless you’re a bear, I’m not sure the timing is right,” he said.

Likely outperformer

A financial adviser who is bearish said he liked the notes.

“We’re already in a bear market. Not because the S&P is down 20% from its January high. That’s irrelevant. We’ve been in a bear since January because the S&P has been making lower highs. That’s a more accurate definition of what a bear market is,” he said.

Investors considering the notes should have an idea of how long they expect the current bear market to last.

“One year is a short time. I see this bear market lasting two or three years. It’s longer than average but current market valuations are at record highs. The higher the overvaluation, the greater the chance of a severe and durable bear market,” he said.

However, this adviser said he liked the risk-adjusted return of the notes.

“Because you have a buffer and not a barrier, you’ll do better on the downside than if you were long the market. The risk is if the index overshoots on the downside. But even if it breaks the 20% threshold, say it’s down 40%, you’ll lose 25%, not 40%.

“If you’re wrong, if the market recovers, you get that 8% automatically. Eight percent is a decent return.

“I think it’s worthwhile to take the risk of being down more than 20%. You’ll either outperform or underperform. And your losses if any are limited. The risk-reward is favorable,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 48133G2C6) settled on Wednesday.

The fee is 0.6%.

© 2015 Prospect News.
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