JPMorgan’s $1.71 million uncapped dual directional buffered notes is a 'win,' adviser says

By Emma Trincal

New York, March 23 – JPMorgan Chase Financial Co. LLC’s $1.71 million of 0% uncapped dual directional buffered return enhanced notes due March 20, 2025 linked to the S&P 500 index and the Russell 2000 index combine many of the most attractive terms in one note, advisers said.

If each index finishes at or above its initial level, the payout at maturity will be par plus 1.172 times the return of the least performing index, according to a 424B2 filing with the Securities and Exchange Commission.

If the worst performer declines but finishes at or above 90% of initial level, the payout will be par plus the absolute value of that index’s return.

Otherwise, investors will lose 1% for every 1% decline of the worst performer below 10%.

A win

“I like the idea of having an absolute return component,” said Matt Medeiros, president and chief executive officer of the Institute for Wealth Management.

“Having the leverage when you have low return expectations as we do is attractive too. Anytime you have leverage plus uncapped returns, it’s a win. We often see notes that are uncapped. But the leverage is usually missing. So, I like the return enhancement in this particular security,” he said.

Combo

Another financial adviser said he was intrigued by the notes as the structure combined leverage, unlimited potential for gains on the upside, buffer and absolute return.

“In just one note? Normally you don’t see all these pieces in a short-term product like this. You would have to go four or five years. To get it in two years, that’s what caught my eye,” this financial adviser said.

Relatively tight

The creditworthiness of the issuer was also a plus.

“All the CDS spreads have widened. JPMorgan is among the most secure banks out there. But spreads have widened so much all across the board, all of a sudden, credit is a huge issue again,” he said.

On Thursday, the credit default swap rate of JPMorgan was 88 basis points, according to S&P Global Market Intelligence.

It was the tightest CDS spread among large U.S. banks all showing spreads in excess of 100 bps, except for Wells Fargo & Co. posting a 95 bps swap rate.

Short, uncapped

This adviser also liked the payout on the upside.

“It’s the best bang for your buck,” he said.

Advisers often face a difficult choice when it comes to leverage. Should they extend the duration to uncap the gains or on the contrary opt for a shorter note but tolerate the cap?

His preference was the latter in general. But this note solved the usual dilemma being at the same time short-dated and uncapped, which made it “interesting,” he said.

“Here you’re getting 1.17 times, which should be enough to cover the unpaid dividends.

“And to have 1.17 x in a two-year note with unlimited gains...I’m quite happy with that.”

Buffer, dispersion

The downside structure was also interesting, he said.

“You’re getting a pure buffer, not a barrier. To me, the danger zone is when the index drops 20% to 30%. If you only have 20% to 30% in contingent protection on a two-year and it breaches, you’re taking too much risk, especially with a worst-of.”

The buffer offered some peace of mind, he said.

“Ten percent isn’t huge. A buffer is not going to cover all of your losses, but you’re still ahead of the game.”

The odds that the S&P 500 index would drop more than 10% on a two-year rolling period are 7.4%, he noted based on a Monte Carlo simulation.

For the Russell 2000, the frequency was almost the same at 7.5%.

The risk was not insignificant, but the chances of breaching the buffer strike remained small, he said.

On the other hand, the “reward” was attractive given the leverage.

“I make money on the upside. I have no cap. I beat the index on the downside. I don’t see a lot of bad outcomes,” he said.

Last item on his checklist: the correlation between the S&P 500 and the Russell 2000 at 0.895 was “relatively high,” he said.

“Not a ton of dispersion risk here.

“This note is a win.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Monday.

The fee is 0.95%.

The Cusip number is 48133UV74.

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