JPMorgan Chase & Co became the first bank on Tuesday to say regulators have completed stress tests of its balance sheet and approved a dividend increase and stock buybacks. REUTERS

New York-based JPMorgan Chase and Co. (NYSE:JPM), the nation's largest bank by assets, is expected to report a substantial drop in both revenue and profit Friday morning, as that banking behemoth reveals to the markets what will be more or less the final tally on its ill-advised strategy of putting huge hedge bets on the CDS derivatives market through its proprietary chief investment office, the embarrassing episode that has now been engraved into the pages of financial history as the London Whale scandal.

A survey of 17 analysts by Thomson Reuters finds the mean expectation is for JPMorgan to report profit of $3.27 billion for the quarter, or 78 cents per share, on revenues of $21.93 billion. Those results would be a substantial drop -- of 35.5 percent in profit and 20 percent in revenue -- from comparable quarterly numbers a year ago. But the chances of earnings coming in close to those estimates are slim, and analysts are likely to see their predictions blown to smithereens one way or the other depending on how much the trading charges amount to. Estimates have pegged potential losses anywhere from $2 billion to $9 billion for the quarter.

Bipolar Expectations

If losses are closer to the $2 billion figure JPMorgan initially reported when it announced the fiasco May 10, the company will soar past expectations, likely sending its stock into orbit. If they are closer to the $9 billion amount that was suggested in a recent New York Times article, however, the company executives and its publicly traded shares will be in for a bruising Friday.

Indeed, a huge move after earnings one way or the other is exactly what market-makers were putting their money on early in the week, with both bearish put and bullish call options on JPM shares trading at a considerable premium as traders piled onto a high-volatility strategy known as the straddle options trade. That strategy presupposes JPMorgan stock will move by more than 4 percent one way or the other Friday.

The perception of risk has been going higher with JPMorgan on the one hand, while dwindling lower for Wells Fargo on the other, Ralph Edwards, director of derivatives strategy at Investment Technology Group, told the Wall Street Journal Wednesday, comparing trading action on JPMorgan with a major rival that is also reporting earnings Friday.

Reputation on the Line

Beyond how much the trading losses will affect the company's bottom line, investors and analysts will pay attention to the ticker during a two-hour conference call following earnings Friday, trying to gauge whether the company has regained the trust of the market.

Marty Mosby, an analyst at Guggenheim Securities, is optimistic on this point, writing in a June 13 note that we originally believed it might take two or three quarters for management to contain the potential loss related to this position; however, given [CEO Jamie] Dimon's statements, we would not rule out a strong communication in the upcoming July 13 earnings call.

Black eyes heal, Jason Goldberg, a banking analyst with Barclays Capital, told the Dow Jones Newswires. To the extent that they have worked down the majority of the position, we could start to put this issue behind us.

Not all analysts agree with that assessment, however. Among the most pessimistic is Mike Mayo of CSLA, who told the Newswires he'd talked to enough investors over the last couple months who thought the degree of rigor at the top of the house had slipped as indicated by this incident and that bank management remained in a probationary period.

Other Line Items

Of course, once the initial brouhaha and pundit spin surrounding whatever the reported trading loss figure ends up being dies down, there will be other items in the financial statement to consider.

Some mentioned so far: The bank might surprise the markets by making major announcement as to liabilities in other under-the-radar legal issues, such as a current dispute with various credit card companies, or the ongoing investigation into whether the bank -- like British cousin Barclays PLC -- manipulated global interest rates.

There might also eventually be some attention to how the bank's 260,000 employees not engaged in risky derivatives trading performed in the quarter.

For at least a few hours, however, expect it to be the London Whale show all over again.