Sanford Bernstein Lowers Bank Targets

BAC, C, & MS Lead Banking Stocks Lower

Banking Stocks Get Attention Prior To JPM & C Earnings

Scott Redler of T3 Live shares his view on banks prior to earnings. 

Citi's Reverse Split

Open publication - Free publishing - More c

Citi Research 4-28

Open publication - Free publishing - More 4-28

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.

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.