JPM (JP Morgan)

As the market turned choppy in late April with higher volume, unable to make new highs, we anticipated a drop ahead. Classic action after a strong run: stocks hit new highs but then cannot make further headway. Higher volume tells you that the buyers are still trying to push it upside but the sellers have caught them, selling as fast as the buyers are buying. With GS in trouble already we started looking for financial stocks to play to the downside.

JPM turned and sold fast with a gap lower, dropping quickly to the 200 day SMA. Okay, missed the first run but there are always tests and then new runs. JPM bounced up off the 200 day, and we prepared for another downside leg, putting a play on the report on 5-1 on the weekend report. Monday JPM bounced; that has been the pattern: a Friday selloff in stocks, then a Monday bounce. We prepared: if JPM turned lower the next session it was ready to enter to the downside.

Sure enough JPM did turn lower and we moved in, buying some June $43 strike put options for $2.52 with the stock trading at $42.37. The next session JPM tried to rally back but gave up a gain to close modestly lower. Then came May 6, the 'flash crash' session. Stocks dove lower and JPM, a leading financial, was of course pulled down with them. It dove to $39.29 on the low, and though that was not our target price (that was $38.26), when opportunity strikes, you take advantage of it. With such a massive plunge in the market, volatility surged. That pumped up the implied volatility portion of option prices. Thus, even though JPM was not at our target the option prices jumped. When JPM started to turn back up we jumped in and sold some of our option positions for $3.95, banking 56.7%. Luck favors those that are in the game.

After that dive JPM managed to reverse, moving up to the 200 day SMA it tried to hold in early May but failed. It moved through the 200 day on 5-10, but by the close it reversed, closing higher, but giving up the 200 day it overcame intraday. That was a perfect entry point for some more positions . . . and we missed it. We did put a new play on the report on 5-11, however, after JPM again rallied higher intraday but faded well off the high. On 5-13, JPM was ready to start selling again. It gapped modestly lower and started down. That was our trigger on the new play.

We bought some September $42 put options for $4.25, of course anticipating more downside. Next session JPM gapped lower and could not close the gap. A pause the next session, a gap higher on 5/18, but that gap reversed and JPM dove lower. Next day another upside try but it was not going to last; the die was cast. On Thursday 5/20 JPM was down again, hitting $37.31 on the low. It hit that point and held. Significant because that is also the February low where JPM reversed for that strong February/March/April run. That level also held back in 2008 and even before then. That was our initial target and we sold some options for $6.40, banking 50+%. We also took the rest of our original position. We left part of the new position: you never know when the market will simply keep selling more than you think it should.

Well, that wasn't the case this time. Friday JPM gapped lower and undercut the support level. No issue with that, but as often happens after a sharp selloff, when a key support level is broken the shorts come in to cover positions, figuring it won't get any better. Sure enough JPM reversed and started to surge back up. We didn't waste any time when JPM reversed and moved up through that key support level. We closed out the last part of our JPM puts. Now, believe it or not, we are looking at playing JPM to the upside for a roll back up in its range.

Our motto is 'take what the market gives,' and as you can see just because we have one position on a stock we won't hesitate to add positions when a move gives us the opportunity and the risk/reward remains well in our favor. Thus we added downside positions when the opportunity presented itself, and now we are looking at moving to the other direction altogether given what that pattern and market is showing us. That is what you have to do in the market, especially so when the times are as volatile as they have been since late April.