Trade Update $C – Taking Off Half For Double

by Enis February 26, 2013 10:49 am • Commentary

Citigroup has declined sharply in the past 2 days as the European contagion risk has resurfaced.  With my trade at a double here, I’m going to take off half and leave the other half on.  The market feels very dangerous overall, but this is a situation where it makes sense to take profits as the market falls, and potentially reload on rallies.  Not a time to be too greedy in my view.

ACTION: Sold to Close half of C ($40.30) Mar15th 41 / 39 put spread at $0.88 for a $0.44 gain, leave other half long at cost base of $0.44

Original Trade Feb 4th, 2013: 

Since Greece first said that its government books were essentially cooked more than 3 years ago, the European banking crisis has lurched back and forth between calm and inferno more times than I care to count.  In the interim, policymakers have unloaded their bazookas, and calm has persisted since the summer of 2012.

With investors worldwide singing the tune of “Happy Days are Here Again” as recently as last week, certain European asset prices have gradually been leaking lower.  Today is the day that stocks in Europe have followed, with the SX5E down 2.5%, almost unchanged on the year (after being at 1.5 year highs just last Tuesday)

Not surprisingly, Spain and Italy are the leaders on the downside, both down more than 3% today.  Spain is actually down 2.5% on the year.  But France and Germany are now up less than 1% in 2013.  Those 4 countries combined have a GDP of $9 trillion USD, or 60% of the U.S. economy.  So not quite peanuts.  The question is, does Europe’s weakness have implications for U.S. stocks?

My main takeaway is that global investor risk appetite is much diminished compared to just one month ago.  The emerging market ETF, EEM, is actually lower in 2013 as well (led by weakness in South Korea and Taiwan), and the chinks in the global risk-on thesis are gradually adding up.

Put it all together, and I think the time is finally ripe to play for some weakness in U.S. markets.  There are many U.S. companies exposed to global weakness, but Citigroup is my preferred vehicle because of its extensive international exposure overall (more than 50% of revenues), and since its also exposed to another European financial flareup as an international bank.

To be clear, I’m not expecting a drastic fall from current heights, but given that the S&P 500 is up more than 5% on the year while other markets slowly fall by the wayside, I think a respectable pullback is upon us.

TRADE: C ($42.57) Bought the Mar 41 / 39 Put Spread for $0.44

-Bought 1 Mar 41 Put for $0.79

-Sold 1 Mar 39 Put at $0.35

Break-Even on March Expiration:

-Profits between 40.56 and 39, max profit of at 39 or below

-Losses up to 0.44 between 40.56 and 41, max loss of 0.44 at 41 or above

Trade Rationale: Citigroup stock closed 2012 at $39.56, so I expect buyers to step in around that level if it does get back to the unchanged market for 2013.  My trade targets a move to that area, and I’m only risking 0.45 for a 2 dollar wide spread.   I also have about 6 weeks of time value, so plenty of time in case I’m not immediately correct in my view.