Make a Guarded Play on Citigroup Stock

by John Kmiecik | September 26, 2013 8:29 am

Once again, there is some uncertainty in the market due to the fact that Democrats and Republicans cannot play nice together, and a trader has to take this into consider when placing a trade.

Here is an options trade on Citigroup (C[1]) that considers the general outlook of the market.

Citigroup Stock ($49.26): Put Credit Spread

The trade: Sell the Citigroup Oct 11 47/48 Put Credit Spread (selling the Oct 48 put and buying the Oct 47 put) for 25 cents or better.

The strategy: The maximum potential profit for this trade is 25 cents if Citigroup stock is trading above $48 at October expiration. The maximum loss is 75 cents ($1 – $0.25) if C is trading below $47 at Oct-11-13 expiration. Breakeven is $47.75 at expiration based on a credit of 25 cents.

The rationale: Citigroup is a banking giant that has been generally well regarded by analysts in the past. The banking industry as a whole has been under fire lately, with many banks laying off workers (primarily in their mortgage divisions), including Citigroup. With the debt ceiling issue hanging overhead, it might continue to be an indecisive market. But just this week, the president of Argonaut Capital said he believes financial stocks — like the market — might be heading higher in the fourth quarter.

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Like a lot of stocks over the past several sessions, Citigroup stock has declined. But the key component to this trade profiting is the chart.

C shares have come down to a potential area of support at an upward-sloping trend line. If the area holds, this trade will be successful. Every time during the past six months that Citigroup stock has threatened to move lower, it reversed off of that support line and moved higher.

I avoided a more directional trade idea like a long call because the market has been a bit unstable recently. Selling a put credit spread enables the option trader to still profit even if the stock doesn’t move higher, as long as it stays above the short $48 put.

Citigroup is expected to announce earnings on Oct. 15, just after this trade’s expiration.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[2].

  1. C:
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