JPMorgan’s $1.96 million leveraged notes on indexes offer no cap, absolute return

By Emma Trincal

New York, Dec. 11 – JPMorgan Chase Financial Co. LLC’s $1.96 million of 0% uncapped dual directional accelerated barrier notes due Dec. 3, 2026 linked to the Dow Jones industrial average and the Nasdaq-100 index impressed advisers for the combination of uncapped leveraged upside and absolute return over a relatively short tenor.

If the worst performing index gains, the payout at maturity will be par plus 123% of the return of that index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par plus the absolute value of the worst performing index return if the worst performing index declines but finishes at or above the 70% barrier.

Otherwise, investors will lose 1% for every 1% that the worst performing index declines from initial level.

Premium generator

“I generally don’t like those worst-of, but what they do with options when the underliers are not exactly correlated is how they’re able to improve the terms,” said Scott Cramer, president of Cramer & Rauchegger.

“This one actually doesn’t sound bad. You get the uncapped leverage over three years point-to-point which is very unusual,” he said.

Having the 30% contingent protection with absolute return was also unexpected for that type of maturity, he noted.

“These are great terms,” he said.

Cramer attributed those results to the worst-of payout, which generates premium.

“The Dow is much different from Nasdaq. There is no overlap,” he said.

“If you like the Dow and the Nasdaq, a combination of both in a worst-of makes sense.”

It is impossible to guess which of the two underliers would be the worst performing one at maturity, he said, but he was inclined to think it may be the Dow.

“The Dow is likely to be the drag on the performance even though we don’t know for sure. It may do very well. The Dow may not outperform the Nasdaq, but it doesn’t mean it won’t grow,” he said.

Barrier, dual directional

The performance of both indexes will depend in part on interest rate moves.

“Normally if interest rates get lower, the stock market should be doing well,” he said.

“But if rates drop due to a rate cut, things may not be doing so well. We may have a recession, or something is broken. How we get to a Fed rate cut is going to be impactful,” he said.

Cramer was comfortable with the level of downside protection, however.

“A 70% barrier is a lot over a three-year period although the Nasdaq could be down 30% because it’s kind of volatile,” he said.

This did not make the dual directional feature less attractive.

“The absolute return is valuable especially when you’re exposed to the worst-of, unless of course it goes down below the barrier,” he said.

Overall, Cramer said he liked the notes.

“The risk-return is solid. No cap and leverage on a three-year note is very good. The protection is good too. Being down 30% is a lot over three years,” he said.

“It’s a good offering.”

No catapult

Ken Nuttall, chief investment officer of BlackDiamond Wealth Management, also liked the structure.

“That’s a nice note,” he said.

“I’m amazed they were able to do a leverage no cap on three years.

“Unless you do a catapult, I don’t see this no-cap on that type of maturity. You tend to need at least five years.”

The so-called “catapults” are notes offering uncapped leveraged participation by including a one-time autocall usually at the end of the first year. The enhanced upside can be priced over shorter tenors because of the call option, which reduces the cost of the upside.

Nuttall said he has seen comparable terms on notes that were not structured as catapults. But the underlier employed was the S&P 500 Futures index.

Nothing close

“I’ve seen comparable terms on the S&P 500 Futures but not as good as these,” he said.

For instance, he recently saw the pricing of a BNP note with a four-year term, 1.4 times leverage with no cap and full principal protection on the S&P 500 Futures index. On the same index, he spotted another BNP note with a two-and-a-half-year tenor, no leverage, a 24% cap and full principal-protection.

He also pointed to a three-year Morgan Stanley note on the S&P 500 Futures index with principal protection and no cap, but the leverage was only 1.1 times.

None of those offerings offered absolute returns.

“Nothing really near those terms.”

“It’s a worst-of, so you have to take this into account. Maybe the Nasdaq won’t do as well as it did.

“But you get the full upside and the absolute return.

“In general, I expect a no cap on a five-year, possibly on a four year, not over a three-year term.

“I wish I would have seen this deal,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Dec. 5.

The Cusip number is 48134BU50.

The fee is 0.39165%.

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