At Thursday’s closing share price of $57.14 the market for JPMorgan Chase's options implied a 30.5% chance that by the May 23 expiration, its shares would settle below $55.50. In pre-market trading its shares have posted a decline of 3.5% to stand at $55.32. Assuming the typical post-earnings decline in volatility, our calculations suggest shares in JPM now stand a 50% chance of closing below $55.50 by May expiration. The fact that it missed on both revenue and profit in its just announced first-quarter earnings release has invited selling and prompted fresh worries over the health of the US housing market. In particular, JPMorgan’s mortgage business posted a larger loss than was assumed by analysts ahead of the number prompting a rethink about the outlook for lenders.
The chart shows the before and after using the IB Probability Lab using our best approximations for the likely impact when the opening bell sounds on Friday. In the plot we examine the impact using May expiration and contrast the Probability Distribution before the numbers (blue bell curve) and the likely scenario based upon pre-market trading prices and an expected decline in implied volatility.
At Thursday’s closing price option traders priced in a 50% likelihood of closing beneath $57.50 by next month’s options expiration. Our implied option prices now suggest only a 28% chance of closing above there in one month as the share price declines. Note that in the plot below we are assuming a 13.7% post-earnings drop in the level of implied volatility.
In the aftermath of the earnings miss investors will be keen to see whether or not analysts shift their expectations for JPM where the average 12-month price forecast across Wall Street is currently $66.40.
JPM shares slide 3.5% on earnings miss.