Citi's Reverse Split

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Follow Up: BAC - Right Now (Bank of America Inc.)

Wanted to take a quick second to do something we don't usually do, which is review a previous post and connect some dots. Today BAC made the move many were anticipating - a break above the declining tops line and a run towards the gap. I'm disappointed to say that despite having stalked this trade, I did not cash in nearly as much as I would have liked. The move off the open was sharp and quick and I would have preferred to buy the early pull back. One axiom we hear a lot is the market moves in the direction that hurts the most people. Quicker moves like this can often be indicative of shorts getting squeezed. The rapid buying and the lack of sellers causes a bit of a panic and that looks like what might have happened today.

Here's a look at how it went down.

I'm not sure BAC is done basing, but it will be very telling of short interest if it gets squeezed into the gap tomorrow. If it does get into the gap, I will most likely be looking to fade the gap fill for a quick trade. Good luck, and remember to stay light and tight.

BAC - Right Now

Here's what I am watching

Baby break of today's opening range (bullish bias but not overwhelming)
Gap up above that could draw price higher
Declining tops line resistance
Divergence in price and MACD over 3 days that makes me wonder if a near term bottom is forming.

Good luck!

A Quick Look at the Charts : BAC (Bank of America) & C (Citigroup Inc.)

Experimenting with posting a few 60 min charts here. Let us know how you do/do not like it...

A quick look at the charts - Bank Of America and Citigroup Inc.

Trade of the Day: Short 5,000 Citigroup Inc Jan 13 5.5 straddles

Today one strategist sold 5k Jan 13 5.5 straddles for $1.95. (*Note there is some debate weather the trader went synthetically short or shorted the straddle but for education purposes lets assume they sold the straddle.)

Max risk is unlimited, max gain is the credit of $1.95 per spread or $975,000. The spread is short vega (volatility), short gamma, long deltas (right now), and the passage of time helps.

Lets take a look at the risk reward:

This trade is very interesting to me because this trader doesn't lose money between 3.55 & 7.45! Plus he is short volatility which has been on the high side post crisis and ought to come down to the mid 20's unless the economy has an outside shock or double dips (which is always possible). Below is a chart that shows the profitability zone:

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

Option Flow Recap Feb 23

Macro /  Thematic

SPY – 100,000 March 126 / 116 put spreads appeared bought for $0.83

Consumer

LYV – Over 4100 of the July 10 puts traded today (77% on the offer) for ~1.15. It appears some investors are bracing for further downside in the entertainment company.

F – 25,000 March / April 15 call spreads were bought today for $0.26. It is either a roll out a month or a bet that the shares will hold below 15 between now and March expiration (3/19) and then rally from that point.

GM – Options were active ahead of the company’s earnings report tomorrow morning. Over 98,000 calls and almost 62,000 puts traded on the day. One notable trade was 4000 June 40 / 34 collar for $1.00.

Energy

KWK – Call options were active today with over 11,000 calls and only 1900 puts trading. March 16 calls were the most active with almost 6600 trading on the day (52% on the offer). The activity comes ahead of the company’s earning report due February 28^th, before the market open.

PBR – 4500 April 42 / 45 1x2 call spreads were purchased for $0.34. It appears to be a bullish play targeting $45 per share by April expiration.

SD – 3000 of the June 6 calls were bought for $3.00.

Materials / Industrials

SLW – 3000 of the March 41 / 38 put spreads appeared bought for $1.37 to open.

IPI – 2200 June 40 calls were bought for $1.70, to open.

CF – Options were active today as the stock reversed a nearly 8% decline in the morning to end the day up almost 2%. 28,000 calls and 13,000 puts traded on the day. The April 125 calls were the most active with almost 5500 trading on the day.

Tech

EMC – The stock saw a lot bearish flow this morning with over 23,000 April 26 puts trading in the first hour of the day. Most of the flow appeared to be opening customer buyers

STX – Bullish activity today with 18,000 September 12 calls being purchased for $1.95. The calls were bought to open.

Financials

C – 70,000 January’12 7.5 calls were bought for $0.06.

AIG – 5000 January’12 35 puts were sold at $3.95, tied to $40.03 stock. The puts were sold to open.

Healthcare

CLDA – 6500 June 40 straddles appeared to be bought for $10.25 to open.

*Special thanks to Flotilla Partners, Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, and all of the options desks and traders we work with to provide the option flow!

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

Trade of the Day: C Sep Bull Vertical Risk Reversal

The Trade

A trader bought 9,141 September $4.5 calls at $0.57, sold 9,141 September $5 calls at $0.32 at $0.32, and sold 9,141 September $4.5 puts at $0.37 for a credit of $0.12 or $109,692.

Risk/Reward

The trade is a call bull vertical that is executed for a $0.12 credit by selling the $4.5 September put. As you can see from the graph above, the risk reversal is bullish. The maximum risk is being put the stock if the underlying is below $4.5 at expiration. The maximum profit potential is capped at an underlying price of $5 and above at expiration. At this price level and above, both short options expire worthless, and the long calls get exercised. Above $5, the max profit for the spread would be $566,742. The break even underlying price level at expiration is $4.38.

The line shown is the lower break even price.

Citigroup traded 1,378,563 contracts today compared to an average of 828,435.

Trade of the Day: C January '12 bull vertical risk reversal

The Trade

A trader bought 40,000 Jan '12 $5 calls at $0.58, sold 40,000 Jan '12 $5.50 calls at $0.37, and sold 40,000 Jan '12 $4 puts at $0.23 for a credit of $0.02 or $80,000.

Risk/Reward

As you can see from the graph above, the bull vertical risk reversal is basically a bull vertical call spread that is partially financed by selling the $4 puts. Since we are naked long the puts, our max risk is being put the stock if the underlying drops below $4. The max risk is $15,920,000 if the stock goes to zero. The max gain would occur at or above an underlying price of $5.5 where the spread would be worth $2,080,000. Above an underlying price of $5.5, both the long and short calls would be in the money, therefore, limiting the profit potential. The break even price of the underlying is $3.98.

The line shown in the chart above is the underlying break even price. The 52-week range for C is a low of $3.34 and a high of $5.15. Citigroup traded 636,255 contracts today compared to an average of 813,793.

Trade: XLF May $15/$19 long strangle

The Trade

A trader bought 98,889 May $15 puts at $0.19 and bought 91,080 May $19 calls at $0.13 for a debit of $0.32 or $3,062,931. The spread is long delta, and therefore, has a slight bullish bias.

Risk/Reward

As you can see from the risk/reward graph above, the long strangle has limited risk and unlimited profit potential. The max risk for the strangle is the debit. The lower and upper break even underlying price levels are $14.69 and $19.34. Knowing the characteristics of a long strangle, a large move in the underlying helps, an increase in volatility helps, and the passage of time hurts. Long strangles are very risky because in order to be profitable, they need a large move in the underlying.

The lines shown in the chart above are the lower and upper break even underlying prices. At May expiration, if the underlying is in the range shown above, the spread will be profitable. The 52-week range for XLF is a low of 13.29 and a high of 17.15.

The XLF seeks to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index. The Index includes companies from the financial services, insurance, commercial banks, real estate investment trusts, consumer finance, and real estate management and development.

XLF traded 377,404 contracts today compared to average daily volume of 271,410. The top ten XLF components include JPM, WFC, BAC, GS, MS, BK, USB, AXP, MET, TRV.

*Hat tip to MEB Options for pointing this out to us!

Trade: C September $5.5/$6 front spread 1x2

The Trade

A trader bought 50,000 September $5.5 calls at $0.22 and sold 100,000 September $6 calls at $0.12 for a credit of $0.02 or $100,000.

Risk/Reward

As you can see from the risk/reward graph above, the front spread has unlimited risk to the upside and limited profit potential. The unlimited risk is caused by being naked short the higher strike calls. The max gain would occur at an underlying price of $6. At an underlying price of $6, the short calls would expire worthless, and our long calls would be intrinsically worth $0.50 per contract.

The daily chart above shows C dating back to March 2009. At September expiration, the spread would be profitable for any underlying price below $6.52. The 52-week range for C is a low of $3.15 and a high of $5.15.

It's interesting to note that hedge fund manager, David Tepper, raised his Citigroup Inc. stake by 73% in the fourth quarter. Tepper's Appaloosa Management LP's holdings in Citigroup rose to 138.1 million common shares at December 31 from 79.7 million shares at September 30, according to a Form 3F filed with the U.S. Securities and Exchange Commission. Appaloosa also increased their stake in Bank of America, Wells Fargo, and JPMorgan Chase.

A September $5/$5.5 front spread 18,000x36,000 for a credit of $0.03 also traded today.

Trade: C March $5 short straddle 10,000x

The Trade

A trader sold 10,000 March $5 calls at $0.12 and sold 10,000 March $5 puts at $0.22 for a credit of $0.34 or $340,000.

Risk/Reward

As you can see from the risk reward graph above, the short straddle has unlimited risk in both directions, and limited profit potential. The max profit would occur at an underlying stock price of $5 at expiration. The max profit would be the credit of $340,000. The lower and upper break even prices of the underlying are $4.66 and $5.34, which is the strike price plus and minus the credit. Knowing the characteristics of short straddles, we know that a large move in the underlying hurts, an increase in volatility hurts, and the passage of time helps.

The lines shown in the chart above is the upper and lower break even underlying prices of $4.66 and $5.34. The 52-week range for C is a low of $3.15 and a high of $5.15.

Alternative trade

An alternative spread that is more practical for a retail investor that uses less margin is the iron fly. It's less risky than the short straddle but also has less reward. For example, a trader could have set up the iron fly by buying the March $4.50 put at $0.05, selling the March $5 put at $0.22, selling the March $5 call at $0.12, and buying the March $5.5 call at $0.03 for a total credit of $0.26 (minus commissions). Basically, the trader would be short the straddle and long the strangle.

As you can see from the risk reward graph above, the maximum profit would occur at an underlying stock price of $5. The maximum loss risk for the iron fly would be $24 per spread. The maximum profit for this spread would be the credit. The lower and upper break even prices of the underlying are $4.74 and $5.26. This profit window is $0.48, compared to the straddle's profit window of $0.68.

WFC trades 2X its daily average

Wells Fargo (WFC) traded 129,121 options today, 94,688 calls and 34,473 puts vs a daily average of 65,483 options, 37,088 calls and 28,395 puts.  Traders added 844k deltas in the calls and -168k deltas in the puts.

The print that caught my eye was a buyer of 10,000+ in the money March 32 calls this morning.  After these prints hit the tape the stock never looked back.  

There was also a diagonal short calendar spread where a trader sold 2500 of the March 35 calls @ $0.64 and bought 2500 of the Feb 34 calls @ $0.60.  This trade is profitable above $34.17 tomorrow and above $34.73 on expiration day.   This is a professional trade to be long deltas, long gamma, and short vol, for a credit of $0.04.  Here is the risk/reward for tomorrow:

As you can see in the chart below WFC is testing its highs from April of 2010.  This is very interesting when you compare it to the other big banks.  JPM, GS, C, MS, AIG, BAC, USB, PNC and of course XLF are all below their 2010 highs.   

Trade of the Day: C June 5.5/6 bull vertical

The Trade
Today, a trader bought 125,000 June 5.5 calls @ 0.16 and sold 125,000 June 6 calls @ .07 for a net debit of .09 or $1,125,000.

Risk/Reward

As you can see from the risk/reward graph above, the bull vertical has limited risk and limited profit potential. The maximum loss for this spread is the debit. The max profit for this bull vertical would be $5,125,000. The break even price level in the underlying stock is 5.59, which is the long call strike plus the debit.

Citigroup's 52-week high is $5.15. Therefore, for this bull vertical to be profitable, Citigroup would have to make new highs. I would describe the buyer of this spread to be very ambitious because as we can see from the chart above, the $5 level has proven to be a strong resistance level. It is important to remember that most mutual funds cannot own stocks under $5. Therefore, if C can hold above $5 for a week or more, mutual funds might take long term positions in the name.

Alternative Trade

The June 5-6-7 long butterfly for a debit of 0.18 (taking liquidity at the close today).

As you can see, this trade breaks even between $5.15 and $6.85. Although the debit is twice as much as the "Trade of the Day" the break even is .44 lower. The butterfly is also short vega, theta, and gamma. If C does move to $6 being short vega and theta will most likely be a positive. The down side to the the butterfly is the short gamma but only if C runs quickly though $7 without looking back. The butterfly should therefore be unwound when C is trading at or near $6.

Feel free to comment if you have any questions.