JPMorgan’s $1 million autocall leveraged notes on S&P offer fixed or unlimited gain

By Emma Trincal

New York, Feb. 23 – JPMorgan Chase Financial Co. LLC’s $1 million of 0% autocallable lookback buffered return enhanced notes due April 17, 2025 linked to the S&P 500 index offer two different opportunities to generate a profit, making the investment suitable for investors seeking a fixed return as well as unlimited growth.

The market, however, will determine which one of those scenarios will unfold.

The notes will be automatically called at par plus 10% if the index closes at or above its initial level on April 15, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above its initial level, the payout at maturity will be par plus 1.5 times the gain of the index.

Investors will receive par if the index falls by up to 35%. Otherwise, investors will lose 1% for each 1% decline of the index from its initial level.

The initial index level will be the lowest closing level of the index during a lookback period of approximately two months starting on Feb. 14 and ending on April 17.

50/50 chance

“I like the lookback. It takes away a lot of your timing risk,” said Jerry Verseput, president of Veripax Wealth Management.

If the notes are called at the end of the first year, the return will be capped at 10%, he noted.

“The bank is counting on a greater than 50% probability for this to happen. So, you could get called at 10%. If that’s the case and you feel bad because the market is up 15%, you have to remember you took less risk than the market. If the market is up 25%, of course that’s more of an opportunity cost. But there are ways to hedge against that type of risk on the upside.”

He declined to provide more details as his trading methodology is rules-based and proprietary.

More to the point, investors must decide if they are comfortable with the fixed rate of return offered by the call premium.

The second scenario would be more suitable for bulls.

“If you’re not called, you get that unlimited upside exposure with a 1.5 times leverage. That’s the growth scenario,” he said.

“If you want maximum price appreciation, that’s the way to get it.”

Necessary buffer

Verseput had no problem with either one of those payouts – call premium after one year or uncapped leveraged return at maturity.

Instead, he focused on the downside.

“I probably would modify the terms and replace the barrier with a buffer,” he said.

“It would be smaller than the 35% barrier obviously. But I want to beat the market whether the market goes up or down, and I need a buffer to do that.

“I don’t want not to lose money. I want to lose less money.”

Defined or unlimited

Verseput explained that structured note terms can be negotiated to fit the risk-return profile of each client but also to match the way they expect to generate returns.

“When I talk to my clients, I try to find out what their objective is. Is it price appreciation? Is it defined outcome?”

The note happened to offer both scenarios in one product. But there will only be one outcome.

Investors through their adviser can always readjust the terms to meet their personal preferences, he said.

“You could give up your unlimited upside in order to increase the probability of hitting a certain target return. That’s one way to look at it,” he said.

Piece by piece

He offered another example in which investors want more leverage.

“With 1.5 x you don’t have a cap. If you want more leverage, can you go with a cap?”

Alternatively, a cap would be required if investors wanted to eliminate the call.

“Perhaps you want to get rid of the call and go uncapped. In that case you may only have a 0.8x participation rate or if that’s not an option, you may have to extend the maturity.”

Each term can be modified, he explained. But each term also has a cost.

“The premium has a cost, the buffer has a cost, the upside multiplier has a cost, the no-cap has a cost.

“You have to look at what you’re willing to sacrifice in order to get the parameters that you want. It’s always a tradeoff,” he said.

Lookback

Steve Doucette, financial adviser at Proctor Financial, said that ultimately the market will decide.

“With all the brilliant economic minds talking about a recession, the question really is: where are we now in the market cycle?

“I love the reset. If you have some volatility ahead, it can lower your entry point. In two months, you could capture a much better level if the sell-off continues,” he said.

Premium OK

Doucette did not view the call premium as a negative.

“You could miss some upside if you get called in one year. But is the market going to turn around so fast? You don’t know,” he said.

“The 10% premium is not bad. If you’re a bull, it’s low. On the other hand, you may also be ahead of the market. If the market is still down, you go for the uncapped leverage at maturity. That’s a neat payout. You could get a shot at it if we’re indeed heading into a recession because you would avoid the call.”

Mr. Market

Doucette said the Street seems to expect a recession given the “stubborn” inflation. But the market is less predictable.

“Inflation is not under control. The Fed still wants to keep it down and raise rates. We had a big rally in January. Right now, the market is choppy. Who knows what’s next? You never know with the market. It has a mind of its own.”

One saving grace was the length of the notes.

“Five years out, the market could turn around and come back. We could have a rebound. If we’re up, the leverage and no cap will be great. And if we’re not, we still have that 65% barrier in place,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Tuesday.

The Cusip number is 48133UGH9.

The fee is 1.4%.

© 2015 Prospect News.
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