Cheat Sheet – $C Q3 Earnings

by Enis October 14, 2013 9:00 am • Commentary

Event:  C reports its fiscal Q3 earnings on Tuesday, Oct. 15th before the opening.  The options market is implying about a 3.75% one day move, which is above both the 4 qtr avg of about 2.75% and the 8 qtr avg of about 3%.

Sentiment:  Wall Street analysts are bullish on the stock, with 30 Buys, 3 Holds and 4 Sells, with an average 12 month price target of around $59.  Citigroup made a new bull market high around $53.50, but that was all the way back in May.

Options Open Interest:  Open interest is skewed towards puts by a ratio of 1.2 to 1.  Recent volumes have been skewed to calls, with the 1 month call to put ratio around 1.3.  The bulk of the open interest is concentrated in Jan 2014 expiration, with 110k Jan 50 calls, 103k Jan 40 puts, 82k Jan 45 puts, 68k Jan 40 calls and 49k Jan 35 puts.  

Price Action / Technicals:  Citigroup is up more than 20% in 2013, but it never actually broke out above its bull market high.  C was very volatile in 2009 after its multiple capital raises / government investments.  Since then, it has been bounded by the $25 to $55 range, and that remains the case in 2013:

[caption id="attachment_31214" align="alignnone" width="600"]C daily, Courtesy of Bloomberg C daily, Courtesy of Bloomberg[/caption]

The $54.30 high from 2009 was never breached this year, despite several approaches.  Ever since C has fallen away from that level, the chart has not looked attractive for buyers.  However, the stock has been able to hold its 200 day moving average on the current selloff:

[caption id="attachment_31217" align="alignnone" width="600"]C daily, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg C daily, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]

Now that it’s sandwiched between a declining 50 day ma and a rising 200 day ma, the earnings move could give the catalyst for the next major trend.

Volatility:   Realized volatility in Citigroup has been subdued for a couple months now, despite the market’s increased jitters.   As a result, implied volatility is at its lowest level heading into earnings over the past year:

[caption id="attachment_31223" align="alignnone" width="600"]30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro[/caption]

The implied vol is likely to fall back to near 20 after earnings since realized vol has remained low.

Our View:  Citigroup is like most bank stocks – a cheap valuation, but with a volatile earnings stream and constant, unexpected regulatory and balance sheet risks.  The company has done an admirable job under new management of becoming smaller and more focused.  Whether that hurts long-run returns is yet to be seen.  The technical setup is neutral in the short-term.  As for the options, implied volatility is lower than normal, which could be interesting as a macro play, by trading a calendar to net out the earnings impact.  We’ll post later today if we pull the trigger on anything.