JPMorgan’s $1.86 million buffered digital notes on S&P offer sideways bet with bearish tilt

By Emma Trincal

New York, July 13 – JPMorgan Chase Financial Co. LLC’s $1.86 million of 0% digital dual directional buffered notes due July 20, 2023 linked to the S&P 500 index may fit several different market views thanks to an unusual payoff, sources said.

If the final index level is greater than or equal to the initial index level, the payout at maturity will be par plus 7%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes below the initial index level by up to 20%, the payout at maturity will be par plus the absolute value of the index return.

If the index finishes below the initial index level by more than 20%, investors will lose 1% for every 1% that the index declines beyond 20%.

Bearish twist

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, said he liked the note for its bearish edge.

“You are getting more on the downside than on the upside, so it’s more of a bearish bet. But I like the fact that you still get something if in one year the market is up, which is unlikely but possible,” he said.

The one-year timeframe gave investors a high probability to “maximize their gains” via the absolute return payoff, he added.

“You want the S&P to be down but down by less than 20%. In one year, it’s totally possible. I wouldn’t make that bet over a longer period of time,” he said.

That’s because the market has been declining for more than six months already, he explained.

The right tenor

“I think it’s going to go down a little further, then rebound. You could have a deep drop in the fall and a rebound taking us to higher levels in April for instance. That’s a scenario consistent with previous bear markets.

Since it’s only a one-year note, it won’t have much time to go way down and that’s a good thing because you don’t want the market to drop more than 20%.”

Kaplan predicted that during the period, the S&P could be down an additional 10% from current levels but probably not more than 20%.

“I like it because a year from now, the market is likely to finish down between 10% and 20%, which is where you’re getting paid the most.”

If investors are wrong and the S&P 500 index falls by more than 20%, the buffer will significantly mitigate their losses.

“You won’t lose as much as the index. Even in this scenario, you will outperform the market, “he said.

Income substitute

Matt Rosenberg, director at Halo Investing, viewed the notes as a substitute for an income product.

“I think it’s an interesting one. You have the ability to make 7% over one year if the index is up. On the downside, you have a big 20% buffer with absolute return,” he said.

Pricing terms that are equivalent or superior to this product may not be easy in different formats, he said.

“Give me a one-year note, contingent coupon of 12% and a 20% buffer and I’ll take it. But that would be a pipe dream,” he said.

“This digital looks like a good alternative to an income product. It’s designed for sideways markets just like most income notes.”

Tactical

The ability to outperform on the downside as well as getting the equivalent of a coupon on the upside made the product unique, he said.

“I see it as a tactical play. You’re getting two different payoff features within one structure.”

But the main appeal was the buffer.

“There are not many products where you get a 20% buffered protection on a one-year term.”

Some people prefer even more protection, he noted.

“You could ask for a deeper protection with a low barrier, but it would change the dynamic of this product.

“To me, the concept is attractive, regardless of the details of the payoff.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Monday.

The Cusip number is 48133GX57.

The fee is 0%.

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