Shares of Citigroup Inc (NYSE:C) have certainly run into some serious headwinds over the past several weeks. Citigroup stock has fallen over 10% after making fresh new highs at the $80 area in late January. While the stock has bounced off the recent lows, this is a rally that should be sold. I look for Citigroup to head lower in the coming month.
Citigroup reported earnings on April 13, with EPS of $1.68 beating consensus of $1.61. Revenues came in just a tad better than expected at $18.872 billion. So far so good, with lower tax rates definitely a boon to earnings. A deeper drill down, however, shows that the earnings beat was also fueled by a dramatic 38% increase in equity trading revenue due to increased market volatility.
Those overly impressive trading revenue gains are not sustainable and more of a one-time thing, especially now that volatility has lessened. Fixed income trading actually fell 7%. Most importantly, net interest margin (NIM)-the lifeblood of banks-came in at just 2.64% while net interest income fell short of estimates at $11.7 billion.
This explains why the initial euphoric rally following the earnings release faltered so badly. Citigroup stock initially traded higher on the headline earnings before reversing course to close sharply lower on the day.
This type of reversal pattern is many time emblematic of a short-term top in the stock as the buyers become weary and leery.
Click to Enlarge Citigroup has unquestionably broken the uptrend line with the stock now trading at the critical $70 level. MACD is approaching the most overbought readings of the year, with prior readings of a similar magnitude marking significant short term tops in the past.
C options are getting fairly cheap, trading at only the 31st percentile of implied volatility (IV). This favors being long volatility when structuring trades. So to position for a pullback in Citigroup stock, a put diagonal spread is the way to play. The trade includes buying the May traditional options and selling the shorter term May 4 expiration weekly options.
Citigroup Stock Trade Idea
Buy C May $70 puts (expires May 18) and sell C May 4 $68 puts (expires May 4) for a $1.25 net debit.
Maximum risk on the trade is $125 per spread. Ideally Citigroup stock closes near the $68 strike price on May 4 expiration to realize the maximum potential gain.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.