Shares of Citigroup Inc (NYSE:C) tumbled sharply yesterday on fears of a potential financial crisis brewing in Italy and concerns over slowing banking revenues. Citigroup stock fell nearly 4% and closed at the lowest level in almost a year. While certainly a pullback was warranted given those issues, the selling is getting a little overdone in C stock. I look for Citigroup to find support near current levels over the coming weeks.
The political upheaval in Italy caused Italian bond prices to spike sharply yesterday and also renewed fears of a contagion effect in countries such as Portugal, Spain and Greece. Although bond yields did tick up in these “contagion” countries, the move was largely muted.
A trading revenue warning out of fellow megabank JPMorgan Chase & Co. (NYSE:JPM) only added fuel to the selling. It is important to note that JPM warned that revenues would be flat, and not lower. So while growth may stagnate, the recent reaction in bank stocks was based on a recessionary environment and likely overdone.
Click to Enlarge Citigroup stock is getting decidedly oversold on a technical basis. The 9-day RSI is well below the 30 level with a reading of 22.57. Previous instances when C stock was this oversold proved to mark significant short term lows in the stock. Shares are also trading at major long-term support at $66 and a bounce off this area could lead to a counter-trend rally.
In my previous post on Citigroup stock from mid-April, I had a decidedly more bearish viewpoint with C trading near the $70 level. Now that shares have fallen sharply, my bearish opinion has tempered — because price does matter.
Implied volatility (IV) in Citigroup options has risen dramatically over the past few trading days due to the heightened fears and lower stock price, meaning option prices are comparatively more expensive. This favors option selling strategies when constructing trades.
So to position to be a buyer of Citigroup stock on further weakness, a bullish put credit spread makes intuitive sense.
C Stock Trade Idea
Buy C July $62.50 puts and sell C July $65 puts for a 70 cents net credit or better.
Maximum gain on the trade is $70 per spread with maximum risk of $180 per spread. Return on risk is 38.88%. The short $65 strike price is below the major support level of $66 in Citigroup stock.
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/.
