Update – Citibank (C) Dec Put Spread, No Good, Mostly Bad and Fugly

by Dan December 6, 2018 10:26 am • Trade Updates

On Friday afternoon I took a look at the set up in bank stocks into year-end (read: Bank Stocks… The Good, The Bad and The Ugly) focusing on the underperformance in the group to the broad market, but also the disparity in price action between different pockets within the group.

Later that afternoon I summarized my bearish view on CNBC’s Options Action later that day and detailed a defined risk bearish trade in Citibank (C):

Here was the trade idea in Citi when the stock was $64.70 on Nov 30th:

The next identifiable catalyst for Citi will be their Q4 results on January 14th, but I suspect near term any further escalation of the trade dispute, further collapse of DB and a reversal of this weeks enthusiasm of Fed commentary and banks stocks close on lows for 2018.

BEARISH TRADE IDEA: C ($64.70) BUY DEC 64 / 60 PUT SPREAD FOR $1

-Buy to open 1 Dec 64 put for 1.30

-Sell to open 1 Dec 60 put at 30 cents

Break-even on Dec expiration:

Profits of up to 3 between 63 and 60 with max gain of 3 at 60 or lower

Losses of up to 1 between 63 and 64 with max loss of 1 above 64

Rationale: This trade idea risks 1.5% of the stock price over the next three weeks, but given the markets recent volatility, the group’s underperformance, and no shortage of potential tape-bombs risking 1 to possibly make 3 if the stock is back at support looks attractive imo.

Given the short-dated nature of this trade idea, it makes sense to consider a downside stop. As regular readers know we like to use a 50% premium stop on long premium event trade ideas.

Well, that was quick, after a gap opening this Monday on supposed progress on a trade agreement with China, the market has voted otherwise as to the potential of a deal soon, Deutsche Bank continues to make new lows and the newly “dovish” Fed has been viewed as a downgrade of the U.S. economy. All of these points I identified as potential catalysts have caused investors to sell this week.

Now with C at $59.25 as I write, down nearly 10% in less than a week, the Dec 64/60 put spread that could have been bought Friday for $1, and far less on Monday morning is now worth about $3. it can only be worth $4, the width of the spread on Dec 21st expiration. It makes sense to take the profit and move on, at this point you are risking 3 to make 1 over the next two weeks, that is no longer a great risk-reward.

Action: Sell to Close C ($59.20) Dec 64/60 put spread at $3 for a $2 profit.