JPMorgan’s dual directional notes on S&P to outperform, hedge a market drawdown

By Emma Trincal

New York, March 13 – JPMorgan Chase Financial Co. LLC’s 0% capped dual directional contingent buffered equity notes due March 27, 2024 linked to the S&P 500 index offer a bearish bias to investors seeking to hedge some of the current volatility in the market, advisers said.

If the index gains, the payout will be par plus the index return capped at par plus 7%, 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 but by no more than the 29.15% contingent buffer.

Investors will lose 1% for every 1% that the index declines if it drops beyond the contingent buffer.

Asymmetrical bet

Scott Cramer, president of Cramer & Rauchegger, Inc., pointed to the potential returns on the downside.

“It’s probably a good asymmetrical bet,” he said.

“You have a range of return from 29% to 7%. That’s the asymmetrical aspect of the payout.

“I think you can make your 7% on the upside. On the downside, you should be fine too because I don’t see the S&P being down more than 30%.”

One of the advantages of the note was its tenor.

“It’s a short-term play. You can get out quickly,” he said.

Having a deep protection on the downside could be helpful at this time.

“We’re still early with what happened this weekend. It’s going to get worse before it gets better. A lot could change in a year.”

He was referring to the failures of Silicon Valley Bank and Signature Bank over the weekend, which put pressure on the markets on Monday, sparking the biggest one-day drop in short-term Treasury yields since 1987 in a flight to quality.

Not high, not low

Carl Kunhardt, wealth adviser at Quest Capital Management, liked the protection.

“I would do it,” he said of the notes.

“I would just put a small portion of my portfolio, maybe 2% on it. To me this is a hedge. It’s kind of a perfect hedge actually.”

One reason to hold the notes was the benchmark they are tied to.

“It’s my large-core U.S. stock allocation. Always in my portfolio,” he said.

Some investors may be put off by the upside cap.

“Your view on this note will depend on whether you’re a broker trying to maximize returns or an asset allocator trying to optimize returns. I’m an asset allocator. I thrive to balance risk and reward. I don’t chase returns,” he said.

For Kunhardt, the 7% cap over one year was acceptable.

“It’s in my wheelhouse. It’s not really high, not really low. It’s where I expect the U.S. stock market to give me a year from now,” he said.

Broken clocks

The downside payout was more favorable given its range for potential gains.

“I do get all that protection down to 29% with the opportunity to outperform if the market is negative,” he said.

Kunhardt also liked the short tenor.

“It’s a short-term hedge and that’s all you need,” he said.

“Most people want to put a hedge on and leave their hedge on.

“But I don’t think you need a long-term hedge.”

This did not mean the market and the economy will not run into crises as evidenced by the weekend headlines, he said. But long-term, “markets always go back up,” he added.

“Bears are like broken clocks and a broken clock is right twice a day. If you think the world is falling apart, why would you invest? Stick your money under a mattress.

“If on the other hand you’re too greedy, a 7% return will not be enough,” he said.

The note obviously was not designed for bulls.

It would be fair for an investor to try and raise the cap on the upside in order to rebalance the payout. But there would be a cost.

“If you try to raise your cap above 7%, you’re going to decrease the size of your barrier. That means less protection and less of a hedge. You’ve got to pay for your barrier and your absolute return. You pay for it by giving up some upside opportunity,” he said.

Reasonable probabilities

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, expressed a view that was more bearish than what the note was designed for. He nevertheless liked the structure.

“This is a great note if you think the market is going to be range bound for the next 12 months. In that case, it’s a good fit. The absolute return can give you nearly 30% on the downside in just one year. That’s pretty attractive,” he said.

“I personally don’t have such outlook. To me, the stock market is in a precarious position. We can have a drop of 40% to 60%.”

The note in that scenario would not offer any benefit compared to a long position in the market. The barrier would be breached and noteholders would lose at least 29.15% of their investment.

However, Chisholm liked the bearish tilt of the structure.

“In terms of probabilities, I think there is a high chance of seeing a market drop of 20% to 30% so the odds are quite reasonable. This particular setup would just not work for me since I expect a bigger drawdown,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes priced on March 10 and will settle on March 15.

The Cusip number is 48133UXY3.

The fee is 0%.

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