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Citigroup Traders Are Cautiously Complacent

Speculators stock up on bull put spreads on the banking giant

by 6/6/2012 9:54:22 AM
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Citigroup Inc. (C - 26.31) has lost 35% in the past 52 weeks, but the stock's declines could be drawing to a close, at least for the summer. Or so suggests a large bull put spread initiated by option traders yesterday.

In afternoon trading on Tuesday, blocks of 30,000 contracts traded at the out-of-the-money August 22 and August 25 puts. Open interest has expanded dramatically at these strikes this morning, indicating these options were on the opening side. It appears as though the August 22 put was bought above the ask price at $1.11 per contract while the 25-strike puts were sold near the bid price at $2.04 per contract. This bull put spread netted a credit of $0.93 per spread.

If Citi shares stay put or even move as low as $24.07, the spread will be profitable at expiration. Profits max out above the $25 strike at $0.93 (the credit initially collected). The most the strategy can lose is $2.07, should Citi shares be trading south of $22 at August expiration.

Profit/Loss Chart of Citigroup bull put spread
Chart courtesy of OptionsHouse

As long as the stock doesn't lose 3% in the next 72 days, the spread will achieve its maximum profit. And it will be in profitable territory provided C doesn't drop 6.5% between now and then. But as Schaeffer's Senior Technical Strategist Ryan Detrick pointed out in Big Banks Are in Big Trouble, "more lows look very probable" in C shares now that short-term support has been broken. Additionally, the stock's 80-day moving average has turned lower and is headed toward a bearish cross of the 160-day moving average. This would be a bearish development from a technical perspective.

The stock was downgraded yesterday by Raymond James to "outperform" from strong buy, which followed a price-target reduction from UBS on Monday. If this trend continues, it could be a painful journey for C, as the stock is currently rated a "buy" or better at 13 of 20 covering brokerage houses.

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