New Trade Citi (C): Fleeing the Big Citi for a Week

by Dan April 13, 2012 12:52 pm • Commentary

Citigroup reports Q1 earnings prior to the open Monday Apr 16th.  The implied move in the options market is about 3.5% vs the 4 qtr avg move of about 3.2%.

As far as Sentiment is concerned, the street remains fairly positive on the stock with 22 Buys, 5 Holds and 5 Sells.

Technically the chart looks fairly challenged at current levels, recently breaking down below a HUGE support/resistance level at $35, and breaking below a trend channel that had been in place since November lows.

Citi 1 yr chart from Bloomberg

MY VIEW: I want to make a near term defined risk play that the stock will re-test the low from early March which happens to right at its 200 day moving average $31.30.  Given JPM‘s reaction to what appeared to be a solid beat, I think C’s results will not be nearly as good and the stock could be under pressure for some of the following reasons.

1) C was the largest recipient of govt bail-out funds during the financial crisis and the only large money center bank to fail the stress tests in mid March, and denied the ability to raise their dividend.

2)  C is by far the most international U.S. money center bank, with more than half of revenues outside of U.S.  Given American strength in the face of international weakness, could set up for disappointment

3) European banks could be signaling a return to potential contagion, DB for instance is down almost 15% from the March highs.  Optionality in U.S. exposed banks is cheap way to play high European bank volatility.

4)  High expense run rate has been a large factor in C under-performance over the last year.  The problem initially surfaced in the Apr 2011 earnings report, investors will be wary of a repeat performance to start the year.


C implied vol is starting to creep up going into its earnings to levels that, under normal circumstances, would be slightly high historically but nowhere near as high as levels we’ve seen for the last few years of banking and sovereign debt crises. Here’s a look at historical and implied vol from the past 2 years:

[caption id="attachment_10524" align="aligncenter" width="642" caption="C - 2 yr HV vs IV from LiveVol Pro"][/caption]

Here’s how it looks from the past 6 months. Note the steady decline since the Euromess last year, and also the trend of implied vol being higher than actual vol around earnings:

[caption id="attachment_10526" align="aligncenter" width="638" caption="C - 6 month HV vs IV from LiveVol Pro"][/caption]

Here’s how the skew looks within and between months. Note the April expiration is higher than back months and also heavily skewed to downside puts:

[caption id="attachment_10525" align="aligncenter" width="648" caption="C - Monthly Skew from LiveVol Pro"][/caption]


MY TRADE:  C ($33.60) Bought the Apr (next Friday) 32/31 Put Spread for .18

-Bought 1 Apr 32 Put for .34

-Sold 1 Apr 31 Put at .16

Break-Even On Apr Expiration:

Profits btwn 31.82 and 31, make up to .82 with max gain at 31 or below of .82 (4x your money with a move of ~7.5% in a week).

Loses of up to .18 btwn 31.82 and 32 and max loss of .18 above 32