CNBC's Jim Cramer is appalled at Citigroup's (NYSE: C) latest hedge fund move, and calls the current leaders "the worst management team [he has] ever seen." Cramer believes Citigroup now has more exposure to all bad karma in the financial world than any other bank, and he blames the board for falling asleep on the job, or just plain not caring. If you are inclined to agree, then it could be a good time to get into a bearish hedged trade on Citigroup.
After hitting a one-year high of $57.00 in December, the stock has struggled lately, dropping sharply in July and August. This morning, C opened at $45.89. So far today the stock has hit a low of $45.50 and a high of $46.20. As of 11:05, C is trading at $45.70, down $0.31 (0.7%). The chart for C bearish but improving, while S&P gives the stock a very positive 5 STARS (out of 5) strong buy rating.
If you agree with Cramer, then for a bearish hedged trade, I would consider a December bear-call credit spread above the $55 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverages nice returns. For this particular trade, we will make a 5.3% return in less than 4 months as long as C is below $55 at December expiration. Citigroup would have to rise by more than 20% before we would start to lose money.
Personally, I don't agree. I am more of the mindset that the big banks, including Citi may not rise too much, but they won't fall much farther either as bargain hunters who see the impeccable S&P rating could keep a floor under C. If you think the stock won't fall too far, I would look at an October bull-out credit spread below the $40 level. For this trade, we will make an 8.7% return in less than 6 weeks as long as C is above $40 at October expiration. Citigroup would have to fall by more than 12% before we would start to lose money on this one.
If you are particularly gutsy and think Citigroup is likely to stay flat, you could even do both a bull-put and a bear-call credit spread at the same time.
C has not been above $55 since May and has shown some resistance around $50 recently. This trade could be risky if the Fed meeting next week lights a fire under the financial sector, but even if that happens, this position could be protected by strong resistance where the stock topped right at $55 back in May.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: At publication time, Brent neither controls a bullish hedged positions in C. Both this position and the one above can expire profitably at the same time.
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Reader Comments (Page 1 of 1)
9-12-2007 @ 2:31PM
Anne said...
Kramer is right but C is doing a ton of things, buying in Japan and big presence in China, just you wait Kramer, C will start going up soon,