The financial sector is going to react the best/worst to the outcome of the Brexit vote. The dollar will also be extremely reactive depending on the outcome. If they vote to remain the dollar should decline slightly. If they vote to exit the dollar should rocket higher. An exit vote would also spike bonds and lower yields as a safe haven play.
The big banks are heavily exposed to the UK with Goldman getting 26% of their revenue there and JP Morgan 15%. Any Brexit trade is 100% binary. That means it will be a 100% loss or a major gain. However, the stress tests for the major banks are due out on Thursday and again next Wednesday. This could be another factor that could come into play and make it less dangerous.
Goldman options are too expensive for a pure risk position so I am going with JPM.
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JPM - JP Morgan - Company Description
JPMorgan Chase & Co. operates as a financial services company worldwide. It operates through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset Management segments. The Consumer & Community Banking segment offers deposit and investment products and services to consumers; lending, deposit, and cash management and payment solutions to small businesses; residential mortgages and home equity loans; and credit cards, payment services, payment processing services, auto loans and leases, and student loans. The Corporate & Investment Bank segment provides investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication; treasury services, such as cash management and liquidity solutions; and cash securities and derivative instruments, risk management solutions, prime brokerage, and research services. It also offers securities services, including custody, fund accounting and administration, and securities lending products for asset managers, insurance companies, and public and private investment funds.
JP Morgan has 15% revenue exposure to Brexit. That will be the major market mover the rest of the week. They are also expected to increase their capital return percentages for buybacks and dividends. Those will be announced next Wednesday.
I am playing the call side because the potential for a short squeeze on a remain vote or a major buy the dip program on an exit vote. The put options are more than double the call options so it appears everyone is expecting the worst. Shares have declined to the bottom of their uptrend channel.
I am using the August options to capture all the events over the next couple weeks. Earnings are July 14th and we will exit before earnings.
This is probably a 100% loser or a 200% gainer. There is no in between because of the binary nature of the event. We cannot use stop losses on this position because of the potential for opening gaps.
Buy August $65 call, currently $1.15, no stop loss.
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