JPMorgan’s dual directional buffered notes on ETF, index introduce leverage within buffer band

By Emma Trincal

New York, April 12 – JPMorgan Chase Financial Co. LLC’s $500,000 of 0% capped dual directional buffered equity notes due Oct. 10, 2024 linked to the lesser performing of the Invesco QQQ Trust, Series 1, and the S&P 500 index inject a dose of innovation by allowing investors to double up their positive exposure when the underlier price drops within the buffer zone.

If the worst performing underlier gains, the payout will be par plus the worst performing underlier return capped at par plus 14.65%, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par plus 200% of the absolute value of the worst performing underlier if it declines by no more than 20%.

Otherwise, Investors will lose 1% for every 1% that the worst performing underlier declines beyond the 20% buffer.

Playing a choppy market

“It’s a bit different,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

“I’ve seen dual directional with 1-to-1 downside participation, but this one gives you leverage. It’s kind of nice if you have a bearish outlook.”

He said he noticed more dual directional and bear notes lately although such products never represent a significant amount of what gets priced overall.

“But given how the market has been since last year, we’re definitely seeing more,” he said.

“You can buy this note to express a range-bound view or use it a little bit as a hedge in a portfolio that’s overall long equity.”

Bearish tilt

Issuers have put together more innovative products lately, said Beals.

Adding leverage to the downside of dual directional or bearish notes is an illustration of the “creative” trend. Traditionally, absolute return notes are designed for those who do not anticipate big moves in the market in either direction. By leveraging the price decline while keeping the uptrend one-to-one and capped, some of those newer structures emphasize the bearish bias, he noted.

Another example of leverage applied to the downside is GS Finance Corp.’s upcoming 13-month bearish leveraged notes on the Nasdaq-100 index set to price on Friday.

If the index is negative, the payout is 1.85 times the absolute return of the index price decline. If the index is up, investors are fully exposed to the risk of losing 1% per 1% of index gain.

Skew

Beals said the leveraging of the downside may not be simply demand-driven. Pricing conditions have helped too.

“Buying a put at-the-money is now cheaper than buying a call at-the-money,” he said.

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, agreed.

“We’re seeing record call buying,” he said.

“Usually puts are more expensive than calls because people buy them for the protection not for speculation.

“Things are upside down today. Greed is bigger than fear, so as a result, call options are more expensive than puts and more expensive compared to their historical levels. The skew, or the puts to calls ratio, is lower than average. It has changed. It’s out of line,” he said.

The cheaper puts may have a lot to do with the pricing of newer products leveraging the downside, he concluded.

Not bearish enough

Kaplan did not find the JPMorgan dual directional note suitable for his bearish outlook.

“I would stay away from this as far as possible. There is no way we can avoid breaching that buffer level a year or 13 months from now,” he said.

“The market is going to be down much more than 20%. You may lose less with the buffer but you’re definitely going to lose money, not make money. The timing is just not right.”

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 48133VJY7.

The fee is 0.65%.

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