JPMorgan’s notes on Amazon, Alphabet offer less risky alternative to long play, 4x leverage

By Emma Trincal

New York, Feb. 6 – JPMorgan Chase Financial Co. LLC’s $1 million of 0% capped accelerated barrier notes due Jan. 29, 2026 linked to the stock performance of Amazon.com, Inc. and Alphabet Inc. allow investors to bet on two popular growth stocks with the benefit of high upside leverage exposure and downside protection, sources said.

If each stock finishes above its initial value, the payout at maturity will be par plus 400% of the gain of the least performing stock, subject to a maximum payout of par plus 96.5%, according to a 424B2 filing with the Securities and Exchange Commission.

If the worst performer finishes flat or declines by up to 25%, the payout will be par. Otherwise, investors will be fully exposed to the worst performer’s decline from its initial value.

Fire insurance

“That’s a good bet with a reasonable barrier,” said Scott Cramer, president of Cramer & Rauchegger, Inc.

“I would think chances for any of those two stocks of being down 25% in three years are kind of small. And you get the 4x gearing.”

On an annualized basis, the maximum return with such multiple would be 25.25%.

Some advisers aim to achieve higher returns especially on high-growth stocks like Amazon and Alphabet, he said.

“But I wouldn’t think of it in those terms. When you buy a structured note, you’re not doing it to score the highest return. You’re doing it for the protection.

“Getting an investment that can double in three years I think is quite good,” he said.

In addition, getting to the maximum return was made easier with the 4x leverage, he said.

“You’re capped but you’re buying an insurance policy. When you buy fire insurance, you’re not going to complain that the house didn’t burn.

“You didn’t lose your money. That’s the benefit,” he said.

Worst-of

There was one caveat however, this adviser said.

“The only thing I don’t like here is the worst-of. One of the stocks doesn’t do well and you can lose a lot of money. Jeff Bezos dies and you’re in trouble,” he said.

Investors faced more uncertainty with Alphabet than with Amazon, he added, pointing to “regulatory” risk.

The Department of Justice and eight states are suing Alphabet accusing the search giant of dominance in digital advertising.

“All things being equal you’re taking the chance that one of those two companies could do poorly.

“If you want growth, these are growth stocks. But with this note, you can get them with the downside protection,” he said.

In general, investors are attracted to structured notes for the more defensive exposure to a stock or an index, he said.

“You can’t expect unlimited return when you have that type of protection.”

Asymmetrical participation

A market participant said the risk-reward of the notes was attractive especially with the 4x leverage.

“The 25% cap should not be a problem. The exciting part about this note is that it allows you to buy four times as many stocks as you normally would.

“You’re capped because you get 4x the upside and only 1x the downside plus you have this 25% barrier,” the market participant said.

While some investors may resist the idea of capping a pair of high-flying growth stocks such as Alphabet and Amazon, such objection, he said, was not “reasonable” when examining the terms of the notes.

“First, if you want the growth, you buy the stocks.”

He noted that the cap was aggressively priced.

“They give you 25% compounded a year. In three, you double your investment. Do you really see those stocks continuing to move sky high during that time?” he said.

Long the stock, three calls

The 4x leverage was unusual for a structured note, he said.

“It’s a little bit harder to price but it’s not complicated. You just have to buy more call options. That’s all.”

He described the pricing of the notes as follows, starting with the upside.

First, investors get 1x upside exposure being long the underlying stock.

To generate the remaining 3x exposure, investors buy three “at-the-money” calls. The term “at-the-money” simply means that the strike price and the initial price are identical, both at 100%.

The cap at 196.5% is obtained by selling three calls at the 196.5% strike level. This means that once the underlying price exceeds the strike price, investors no longer participate in the upside returns.

Put spread

The downside lacks any leverage once the barrier is breached. Therefore the “put spread” consists of only one long put and one short put. The pricing for the protection corresponds to the purchase of an at-the-money put combined with the sale of a 75-strike put. The short put position begins to lose money once the price drops below the 75-strike, which is the barrier level. If the price finishes negative but above the 75 put strike, investors are protected from any losses thanks to the at-the-money put.

Earnings

The deal priced on Jan. 25, but stroke on Jan. 24. The initial prices were $97.70 for Alphabet and $96.32 for Amazon. Both companies reported their quarterly earnings more than a week later on Feb. 2.

The disappointing results sent their stock prices lower. Since then, the share prices of Alphabet and Amazon have continued to decline but still remain higher than their levels at pricing. On Tuesday, Amazon closed at $102.18 and Alphabet at $103.47.

In addition, both stocks remain heavily discounted from their respective highs in March with Alphabet trading 44% off its peak and Amazon 33% lower.

The market participant said that pricing ahead of earnings announcements was probably not meaningful.

“The earnings should not be part of the investors’ decision because investors should not be trading volatility. From a pricing perspective, it doesn’t matter. The issuers don’t care because the deal is already hedged,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

The agent is J.P. Morgan Securities LLC.

The notes settled on Jan. 30.

The Cusip number is 48133T4U6.

The fee is 0.6%.

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