JPMorgan’s trigger jump notes tied to Euro Stoxx 50 come with possible alpha, but buffer is desired

By Emma Trincal

New York, Oct. 19 – JPMorgan Chase Financial Co. LLC’s 0% trigger jump securities due Nov. 5, 2019 linked to the Euro Stoxx 50 index come with a return enhancement mechanism named the “jump,” a digital payment that does not cap the upside, something financial advisers said they liked. The issuer included some contingent protection on the downside, giving investors an opportunity to beat the benchmark on both ends over a short period of time. But they also said they would prefer to substitute the barrier with a buffer in order to maximize their chances of outperforming the market and mitigate the downside risk.

If the index finishes at or above its initial level, the payout at maturity will be par of $10 plus the greater of the return and upside payment of 26.1%.

Investors will receive par if the index falls by up to 10% and will be fully exposed to any losses if the index finishes below the 90% trigger level.

The notes provide the potential for alpha, said Steve Doucette, financial adviser at Proctor Financial.

If the index finishes flat for instance, investors can make up to 26.1% with the upside payment. On the downside, a decline of the Euro Stoxx 50 index by up to10% would also give investors the ability to outperform, by up to 10%.

Jump

The upside was the strong part of the structure.

“Getting 13% a year is pretty good to capture gains in a flat market,” Doucette said.

“You’re not capped by this digital. Anything above 26% you’re long the index.”

As a rule Doucette said he uses structured notes to outperform the market both on the upside and on the downside.

“This note gives you a pretty broad range. From down 10% to up 26% you have some room where you can really outperform,” he said.

His only concern was the discrepancy between the upside and the downside. As the note may generate up to 26% of excess return if the index is up, the contingent protection only offers a 10% against the benchmark, he noted.

“You never know where the market is headed. It’s a great outperformance on the upside. But I would add a little bit more on the downside using a buffer.”

Buffer

Substituting a barrier with a buffer may require some tradeoff, he noted.

“I would probably lower the digital. That’s really what you’re giving up.”

Even a lower amount of protection would be better than a barrier, in his view.

“If you burst through the barrier you’re long the index. Then you have zero protection.

“Maybe I would only get a 5% buffer. But at least, if the market drops 15%, I’m keeping my 5%. I lose 10%, not 15%.”

Bullish

Matt Medeiros, president and chief executive of the Institute for Wealth Management, also said he would rather see a buffer in the notes. His rationale was the short duration of the product as a potential additional risk factor.

On the positive side, Medeiros said he likes the underlying and the return enhancement.

“I do like the Euro 50. I do think Europe and emerging markets are an attractive asset class for the next couple of years,” he said.

“I also do like that there aren’t any caps. The digital feature obviously is very attractive as well.”

European equity bulls are having a strong year. The Euro Stoxx 50 index is up 24% versus 14.5% for the S&P 500 index. Strong gains always raise the question of whether the rally will last in the short term, he said.

Tenor

While bullish on the index, Medeiros said he was not totally comfortable with the two-year tenor.

“My concern is that the timeframe is very short. It is conceivable that we could have a correction within the next two years, and the shorter term gives you less time to recover.

“With this type of time horizon, my preference would be to have a buffer-type structure,” he said.

Medeiros said he could keep the two-year timeframe providing that he is in a position to reduce some of the risk.

“If I can’t find it in another type of note, I can probably do some sort of option strategy,” he said.

Ideally I would want something with the same upside characteristics but giving me a little bit more downside protection.”

J.P. Morgan Securities LLC is the agent with Morgan Stanley Wealth Management handling distribution.

The notes will price on Oct. 31.

The Cusip number is 48129J186.

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