On June 3rd we detailed a bearish view on U.S. banks stocks. It was largely predicated on the current rate environment, where we think rates are going globally. We also saw the horrific performance of global banks and the likely spill-over to ours in the coming months ($C Spot $hit). Given the relatively cheap levels of options prices at the time, we chose to express this bearish view with simple defined risk by purchasing a September put in Citigroup (C). Initially a naked put purchase we had an eye towards spreading or rolling if the stock went our way. Here was the trade idea from June 3rd when C was $45.50:
C ($45.50) Buy Sept 45 Put for $2.30
Trade Rationale: I am not choosing to spread with vol low and downside premium looking dollar cheap, with a move through the long put strike I will look to turn into a vertical spread by selling a lower strike put in Sept.
I detailed the trade idea on CNBC’s Options Action on June 3rd:
— Options Action (@OptionsAction) June 6, 2016
Now with the stock at $42, the Sept 45 put is worth about $4.45, a gain of $2.15
We are going to use this weakness to roll this bearish view down a bit and take some gains off of the table.
Action: Sell to Close C ($42) Sept 45 puts at $4.45 for a $2.15 gain
Roll down and in to August:
Action: Buy to Open C ($42) Aug 42.50 / 35 Put Spread for $2.15
- Buy to open 1 Aug 42.50 put for $2.65
- Sell to open 1 Aug 35 put at 50 cents
Break-Even on Aug Expiration:
Profits: between 40.35 and 35 make up to 5.35, max gain of 5.35 below $35
Losses: up to 2.15 between 40.35 and 42.50 with max loss above
Rationale: this roll is using profits from the original trade gains to keep bearish exposure with essentially no risk as the new spread costs the same as the profits from the original put. The new spread has potential profits of 7.50 if the stock is at or below 35 on September expiration.
For those happy with the current gains the entire trade can simply be closed now for a nice profit.