Even after last week’s tantrum, the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is still up 23% in one year. And I strongly believe that this is not the end of the run for bank stocks. Most of the majors like Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC) and Goldman Sachs Group Inc (NYSE:GS) have all had impressive rallies yet they are all still cheap.
So as long as the Donald Trump rally fundamentals remain intact, I expect a bounce in the banks stocks. Specifically, today I want to bet on C stock.
I realize that there will be hiccups. Case in point, last week we saw a sudden market-wide panic in stocks. Consensus reason for the concerns sprung from fears of the rate of change in the 10-year yield. Months ago, higher rates were the driving factor in the bank stocks rally. So selling banks here makes no sense.
Citigroup stock is fundamentally cheap. In absolute terms, it has a low-teens price-to-earnings ratio and for a premier bank, it is a risk I am willing to take. In relative terms, C is also on the low end of the spectrum. So owning the shares in a bullish markets is not likely to be a major mistake.
I realize that traders can be fickle, so I want to create a buffer between my risk and current prices. Meaning I would like the opportunity to enter the stock long but at a lower level if possible. So instead of buying the shares outright, I will use C options to generate income and participate in the bullish thesis without timing the absolute bottom.
Technically, C stock is falling towards the neckline from which it sprung higher a few weeks ago. That zone around $75 had served as resistance for months before the breakout.
Click to EnlargePivot points like this one tend to become forward support. Neither side would be willing to give them up easily, thereby creating a stall which in this case would be support.
I realize that it might not be all smooth sailing. Headlines can spring from nothing. Case in point, late Friday we learned that Wells Fargo & Co (NYSE:WFC) is facing unprecedented punishment over their shenanigans with account acquisition tactics of old.
In this case, Citigroup is a premier bank and Wall Street analysts expect a lot of the stock. It is now trading 10% below the average price target so unless the thesis changes I am steadfast believe in the value of bank stocks here.
C Stock Trade Idea
The Bullish Trade: Sell the C Jun $62.50 naked put and collect 60 cents to open. Here I have a 85% theoretical chance that I would retain maximum gains. But if price falls below my strike then I own the shares and would suffer losses below $61.90.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the C Jun $62.50/$60 credit put spread. The spread has the same odds but would deliver 10% yield on risk. Neither trade require a rally to profit. In fact the stock can fall an additional 18% and I could still retain maximum gains.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.