JPMorgan’s $29.65 million digital notes on Euro Stoxx Banks seen as tactical, risky bet

By Emma Trincal

New York, March 9 – JPMorgan Chase Financial Co. LLC’s $29.65 million of 0% digital buffered equity notes due March 5, 2024 linked to the Euro Stoxx Banks index offer attractive terms commensurate with the risk associated with the region, sources said.

If the index finishes at or above its initial level, the payout at maturity will be the greater of par plus 34% and par plus the index return, according to a 424B2 filing with the Securities and Exchange Commission.

If the index declines no farther than the 90% buffer level, the payout at maturity will be par.

Otherwise, investors will lose 1.1111% for every 1% index decline beyond 10%.

Big sell-off

“The terms look good, but it’s not a totally free opportunity. Look at what the index is doing right now. It’s plummeting,” a sellsider said.

“If the index is up, that’s the good outcome. If it’s not, you can easily lose money below the 10% buffer given the high volatility of this index. European banks just got hammered.”

Between its 52-week high of Feb. 10 and its 52-week low of Monday, the Euro Stoxx Banks index dropped to 78 from 116, losing nearly a third of its value in only three-and-a-half weeks.

High vol.

One of the benefits of the payout in addition to the digital payment was the uncapped participation if the index rose above the 34% level.

“Like anything with high volatility, you can take advantage of it. High volatility will help any structure,” he said.

“It’s a digital plus so you’re not capped at 34%. The way they price the one-to-one participation is by buying a deep-out-of-the money call at the 134% strike, which is going to be cheap.”

The call option is “out-of-the-money” because the current or “at-the-money” price of 100 is below the option strike of 134%. Since the gap between the at-the-money price and the strike price is so wide, the option is said to be “deep” out-of-the-money. It’s “cheap” for the same reason: the likelihood for the call to be exercised is lower.

“They’re also buying an at-the-money digital call, which gives you the fixed 34% payout if you’re above 100,” he said.

Finally, the high volatility provides enough premium to finance the buffer, which is paid for by shorting a put option. he added.

European banks

Matt Rosenberg, director at Halo Investing, pointed to the risk associated with the underlying.

“There are better places to invest your money than in the European banking sector right now,” he said.

“With the war in Ukraine, European banks are perceived as risky even if their direct exposure to Russia is limited. But the war and its possible escalation, the sanctions against Russia and the skyrocketing prices of gas are a concern, especially in Europe. It’s still a story in progress with unforeseen consequences.

The European banking system will be hit first if the region falls into a recession.

“Europe is more dependent on oil than we are. The risk of a recession in this part of the world is much greater.

“The sanctions against Russia are already impacting European private banking. There’s a lot of unknown,” he said.

Tactical play

Rosenberg would have preferred to see a structure paying a positive return even if the index declines.

“You would be better off with an in-the-money digital paying you if the index is down. Or you could play the coupon for a sideways market,” he said.

“But this structure is much more bullish. You have to assume that the conflict with Russia will subside.

“The terms look great; I’m not going to disagree with that.”

But this structure did not offer sufficient downside protection, he said.

“You want some protection or even some positive return on the downside. This note is a great product if the conflict gets resolved. But the risk of losing principal is very high despite the buffer.

“It’s a tactical, opportunistic play. Good for aggressive investors. But not for everyone,” 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 48133DLN8.

The fee is 2%.

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