New Trade Citi (C): Pressing the Short

by Dan July 16, 2012 3:45 pm • Commentary

Citigroup‘s earnings and earnings reaction are further evidence to us that the investment banking-related names in the U.S. are poised for a bout of weakness after earnings season.  Astute investors are aware that despite Citigroup’s earnings beat (and JPM for that matter), the coming 6-12 months present significant challenges for these businesses.  Volume continues to decline in the sales and trading businesses, and the IPO market remains shut after the Facebook debacle.

Perhaps more importantly, a good portion of earnings for both names came in the form of loan loss reserve releases, but that cookie jar will offer far fewer goodies in the year ahead as the banks are near cycle lows for reserves.  Specific to Citigroup, it actually increased reserves in its international business, corroborating the many signs of international weakness that we’ve seen from many different economic indicators.  With the majority of its business outside the U.S., Citigroup will be particularly affected by continued global weakness.

Last week I took off a July 28/25 Put Spread in Citi for a nice gain as the stock neared support and traded near $26.  Now with Q2 results out of the way, I want to roll out and down playing for a break of last year’s lows in the coming weeks.


TRADE: C ($26.71) Bought Aug 26 / 23 Put Spread for .65
  • Bought 1 Aug 26 Put for .85
  • Sold 1 Aug 23 Put at .20


Break-Even on Aug Expiration:

Profits btwn 25.35 and 23, make up to 2.65. Max gain of 2.35 at 23 or lower.

Losses of up to .65 btwn 25.35 and 26, with max loss of .65 at 26 or above.