JPMorgan’s $5.33 million trigger jump notes on WTI crude oil geared toward energy bears

By Emma Trincal

New York, March 1 – JPMorgan Chase Financial Co. LLC’s $5.33 million 0% enhanced trigger jump securities due Aug. 22, 2023 linked to the WTI crude oil futures contracts provide a large margin of excess return on the downside if oil prices drop by less than a half over the next 18 months. While investors may profit whether prices are up and down, the incentive to use the notes as a bearish play or a hedge is greater for bears, advisers said.

If the final commodity level is at least 50% of the initial price, the payout at maturity will be par plus the upside payment of 15.25%, according to a 424B2 filing with the Securities and Exchange Commission.

If the final commodity level is less than the 50% trigger level, investors will be fully exposed to the commodity’s decline from its initial price.

“You’re getting paid for the risk here, and there is risk. At the same time, the idea that oil could be trading at $45 a barrel 18 months from now seems like a low-probability event to me,” said Tom Balcom, founder of 1650 Wealth Management.

A big drop

He was referring to the trigger level. The underlying WTI crude oil contract closed at $91.07 on the trade date, setting the trigger at $45.54, according to the prospectus.

The deal priced a week prior to Russia’s invasion of Ukraine on Feb. 25. Since then, oil prices have moved above $100 a barrel, their highest level since 2014.

April WTI crude oil on Tuesday closed at $106.40.

“It makes sense to have exposure to oil right now. There’s been a big shift toward green energy, but it’s not going to happen for a while,” he said.

“Right now, demand for oil is greater than supply. That’s what is hurting.

“People talk about electric vehicles. But how do you charge your Tesla battery? Electric cars still have a significant carbon footprint.”

High-yield replacement

Oil prices could fall if restrictions on oil extraction eased, he said.

“But how much could it drop in 18 months? I doubt it could go down 50%,” he said.

“Right now, oil prices are up. Even if there was a reversal, how fast could oil go down and how much lower? I just don’t see oil at $45 over such a short period of time.

“The uncertainty around the war in Ukraine, the rising demand for oil post-Covid, the supply and demand unbalance, these factors all point to higher prices,” he said.

Despite the volatility seen in commodities, especially with oil, Balcom said the notes could be used as high-yield replacement.

“Look at the 10-year Treasury yielding 1.7%. The note gives you almost 10 times more. Of course, it’s because you’re taking on much more risk. But they give you a very deep barrier. Fifty percent is quite low. If you’re not extremely bearish and if you have a short time horizon, it may make sense to use this note for fixed-income replacement. I would just put it in the riskiest portion of my fixed-income allocation, in the high-yield bond bucket,” he said.

In conclusion, Balcom said he might consider the notes.

“I like the 50% barrier and I like the short tenor,” he said.

Low barrier

Donald McCoy, financial adviser at Planners Financial Services, said the notes may be best suited for oil bears.

“Given the current war in Ukraine, it’s easy to have a pessimistic outlook. Even though Russia is isolated, it remains defiant. It’s an ugly situation. This invasion ripples through the market. Volatility is surging,” he said.

Most of the structure revolved around the barrier.

“If oil drops 50%, you’re fine. If it falls by 50.01% you lose 50.01%. That’s a big difference,” he said.

But the low barrier strike, which triggers the payout and delineates the protection level, helped mitigate some of the risk, he added.

Economic growth

This adviser however did not rule out the possibility of a barrier breach, especially if surging oil prices begin to weigh on economic growth.

“One concern is you still have 18 months. Within that time, you could have a global recession and oil could drop from its highs to the 60’s. Could it drop to 45? No one knows. Oil prices are notoriously volatile. At least you’re only concerned with the final price at maturity. You don’t have to worry about price moves in between,” he said.

Given the capacity for oil prices to move significantly not just down but also up, investors with a bullish view on oil may shy away from the notes.

“The fixed return is a cap. You can only make 15%. If oil shoots up 150%, you may say: I wish I would have invested in the WTI,” he said.

The WTI Crude Oil contract has already surged more than 20% in a month.

No bulls

The structure of the notes is skewed toward the downside giving bearish investors the greatest benefits.

“You’re getting a lot of downside coverage,” he said.

“The 15% upside is OK. But it’s not very enticing. That’s slightly less than 10% a year.”

It may be challenging to convince clients to invest in a note offering a 15% positive return if the 50% barrier is untouched, he said, especially when few investors are familiar with commodities.

On the other hand, bearish or slightly bullish investors may find the payout attractive, he said.

“You make money on the downside. That’s how you can outperform,” he said.

Alternatively, the notes may be used as a hedge.

“If you have a long position in oil with a lot of gains in it, the note could be used to protect what you’ve earned as opposed to entering a short position.

“For those particular views or needs, the notes may be an option,” he said.

The notes will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Thursday.

The Cusip number is 48130UB95.

The fee is 2.5%.

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