Here’s how I spot hot stocks BEFORE Wall Street pours money into them!
Good afternoon, everybody. JD here with your Rational Trader market analysis daily.
In today’s video, I want to walk through a mean reversion setup I placed ahead of JPMorgan’s earnings — a trade that just played out exactly how I hoped.
If you’ve been following me, you already know I don’t like betting on breakouts or chasing headlines.
I prefer setups where I can define my risk, quantify the edge, and lean on statistical tendencies. That’s what this JPM trade was all about.
What Caught My Attention
It started with JPM trading at $205. That’s about 1% above its recent average — or “mean” — price. Nothing wild, but it was drifting above the mean heading into earnings. And that got my attention.
See, I like to fade moves that stretch too far from the average — especially before earnings. The idea is that after the report, the stock will snap back to that mean price. I call this the “magnet of the mean.” It’s a statistical tendency that plays out more often than not.
So I ran the numbers.
Implied Volatility vs. Reality
Options traders were pricing in just a 2.5% move in either direction. That’s fairly tame for earnings, especially for a big bank like JPM.
And when I looked at its historical earnings reactions, I saw mostly 2–3% moves — except for one outlier in October 2022.
That’s helpful context.
It told me the options market was probably in the right ballpark — maybe even a bit too cautious — and that created an opportunity.
Structuring the Trade
At that point, I started looking at standard deviation levels. A standard deviation is just a way to measure how far a price might deviate from its average. It helps you estimate how extreme a move would be.
Two standard deviations below the mean came out to about $265 on the chart — a long way down from $205.
So I built a defined-risk credit spread:
- Sold the $165 put
- Bought a lower-strike put for protection
That gave me a high-probability trade. It would only lose money if JPM fell more than 19%… way outside the expected move.
What Happened Next
Earnings came out this morning. JPM didn’t crash. In fact, it stayed well above my short strike. The stock is now moving right back toward its mean — exactly as planned.
That’s the beauty of mean reversion setups. You don’t need a massive move to win — just a return to normal.
And that’s what we’re getting with JPM.
At this point, I’d consider closing the trade and locking in the win. The majority of the premium has decayed, the risk has dropped, and the edge has played out.
This is the kind of trade I love. Rational, data-driven, and statistically sound.
Talk soon,
JD
The Rational Trader
