Bullish Citigroup Long Term Option Play
- Posted by Greg Harmon
- on March 21st, 2011
Citigroup made big news today with its 1:10 reverse stock split and commencement of a 1 cent dividend. The reaction ranged from a discussion of the impact to ‘rebate’ traders, to why institutions will now be able to own it since it is over $5/share forcing the price higher, to a higher price will make it a better opportunity to short it. I have not seen any financial analysts calls on it yet recommending a buy or sell or whatever. And from a purely economic perspective this makes sense. No capital is created or destroyed. Just cut the price by 10 and be on with it. As a Technical Analyst the talk of institutions got me looking again at the longer term charts for an idea.
My TA call: Get long this stock, just not right here.
Let me explain with a couple of charts starting with the monthly chart below.
This chart analyzes Citigroup from an Elliott Wave perspective. The March 2009 low was the end of a Corrective Wave and then a new Motive Wave began. With the potential topping occurring this may the point to add a (1) marking the end of the beginning Impulse Wave, or it may continue higher and the (1) is still a ways off. Either works for a long term investor as a bottom has been put in. Now shift to the ascending triangle at the end of the monthly chart, blown up on the weekly chart below.
The weekly chart shows several touches of the bottom of the ascending triangle and a new one today. If there were a break below the rising trend line (remember this picture only shows Monday on the last weekly candle) of the triangle then there are many support points including the 50 and 100 week Simple Moving Averages, the round figure of 4 and the previous support at 3.74. I want to be long Citigroup on a break over 5 or if it falls to 4. If I could capture upside gains in between without risking anything that would be great too, here’s how to do it.
The risk reversal trade is a bullish bet buying an out of the money call and selling an out of the money put to fund it. The table below shows the prices for the September Expiry for Citigroup near today’s close. The play here is in the September Expiry to buy the 5 Strike call and sell the 4 Strike put for a net credit of 2 cents. If the price closes above 5 on September 16 then you exercise or sell the call and own the stock at 5 or pocket the gain. If it falls below 4 then the stock is put to you and you own it at 4. In between, if the stock price rises to 5 early then you can sell the call for a gain.
If you cannot sell naked options then ‘spread’ the sold put by buying the 3.5 Strike put. This leaves you with a bullish call on the 5 Strike and a bullish put spread short the 4 and long the 3.5 Strikes. This also limits the downside potential to 50 cents at maturity, but will cost 5 cents for the package. If that is too expensive, add a sold upside 5.5 Strike call at a 5 cent credit for a net cost of zero.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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