1. By June of 2003, JPM had traded up from a lower options trading
range in the $25.00 area to a new range around $35.00.
2. Since entering the new options trading range in June, the
stock has consolidated into a relatively flat, horizontal options
trading channel. For the most part, this channel is only around
$3.00 to $4.00 wide.
3. This options trading channel is not only tight, but it seems
to be equally dispersed around the $35.00 mark. The stock does
not seem to venture very far on either side of $35.00.
4. From the time that the stock enters the options trading channel,
the range of the channel has been decreasing or tightening,
which indicates decreasing volatility.
Conclusion: JPM sets up a classic text book buy-write opportunity
above. After finding a new options trading range, the stock
consolidates into a tight, options trading
channel that is almost
horizontal. Further, this channel tightens and does not deviate
from $35.00 to the point where it even comes close to a channel
Here, an investor would most likely be interested in writing
the 35 strike price calls to collect premium as the stock trades
sideways. Obviously, there is no way to predict how long a stock
will consolidate like this, but the risks are low, and in this
case the covered call strategy would have returned some very
nice, low risk returns over this period.