Citigroup: Go Bearish as C Stock Limps Along

by John Kmiecik | February 3, 2014 8:45 am

Banks undoubtedly have been hit hard by the recent decline in the market, and Citigroup (C[1]) in particular has felt the pain. Some might argue that C stock might be undervalued, but several factors could keep Citigroup down a little longer. Here is a trade idea on Citigroup stock that takes advantage of that thought.

Citigroup (C — $47.44): Call Credit Spread

The trade: Sell the Citigroup Feb 50/52.5 call credit spread (selling the Feb 50 call and buying the Feb 52.5 call) for 25 cents or better.

The strategy: The maximum potential profit for this trade is 25 cents if C stock is trading below $50 at February expiration. Both call options would expire worthless. The maximum loss is $2.25 ($2.50 – $0.25) if C stock is trading above $52.50 at expiration. Breakeven is $50.25 based on a credit of $0.25.

The rationale: Citigroup stock has been moving lower ever since the company announced earnings in mid-January. Meanwhile, many analysts have downgraded C stock for a variety of reasons. One analyst said “Citigroup’s book value can no longer be trusted.”

Many analysts feel that Citigroup has a problem in its exposure to revenue outside of the U.S. — a whopping 57% of Citigroup’s revenue for the fourth quarter was sourced internationally. The trouble facing European and Asian economies has been well-documented, and this poses a threat to Citigroup because of weaker loan quality. So C stock’s weakness might not last forever … but then, neither does this credit spread trade idea.

Click to Enlarge
Taking a look at the chart, C stock is currently trading below a resistance level that was formed by some pivot levels over the last year. That is one of the key components for this trade idea to work — Citigroup stock needs to continue to be weak and stay below the resistance level.

Another possible key component to this trade is the 200-day simple moving average, which currently is hovering right around the breakeven point of the trade. This could be the last line of defense to hold back C stock from moving higher and into negative territory.

With this recent decline in Citigroup shares, the implied volatility of the options has increased, which might have inflated the premiums somewhat, putting the advantage on the side of the seller of the spread.

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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