On March 17th we took a closer look at bank stocks after digesting Carter Worth’s technical take the prior week on CNBC’s Fast Money. Carter thought the technical set up and the poor relative performance since early December in the group might prove challenging as the Fed embarks on further rate increases and as we get forward guidance during Q1 reporting season. We chose to target Citigroup (C) with a defined risk bearish trade idea. Here it was, from March 17th:
C ($60.70) Buy April 60 / 55 put spread for $1
- Buy 1 April 60 put for 1.15
- Sell 1 April 55 put at 15 cents
C report tomorrow before the bell. With the stock 58.50 heading in, this trade is worth 1.75 mark to market. Obviously, the profits can simply be booked here. For those happy with almost a double, that makes sense. But for those looking to extend the view out, taking away the event itself and looking for further bank stock weakness over the next few months a roll can be done taking away risk while leaving more profit potential:
ACTION: C ($58.50)
- Sell to close the April 60/55 put spread at 1.75
- and
Buy to open the June 57.5/55 put spread for .80 (.05 after roll)
- Buy 1 June 57.5 put for 1.90
- Sell 1 June 55 put at 1.10
Breakeven on June expiration (assuming profits from the roll): Gains of up to 2.45 below 57.45 with max gain of 2.45 at or below 55. Losses of .05 above 57.50.
Rationale – This is a simple roll that takes away the binary risk of the earnings event tomorrow, extends the bearish positioning until June with close to no risk. This is not a new trade we’d do out of the blue, simply a roll for those looking for more profits than the current .75 from the original trade.
Citi reports Q1 earnings tomorrow before the open, the options market is implying about a 2.4% move in either direction, or about $1.40.