In the last post, the hedge position in Citigroup options was closed prior to earning for Citigroup and other financials. With financial earnings season mostly in the rear view mirror and larger volatility risks diminished, CCI decided it was time to re-establish a very conservative hedge. Specifically, CCI sold the May 10 $48.50 call for a modest $.20/contract credit. C was trading around $46.50 at that time.
According to option theory this option has less than a 20% chance of expiring in the money. Conceptually, the two alternatives are
- the highest probability is that Citigroup will trade under $48.50 at/near expiration and this option will expire or be able to rolled out to harvest a modest premium.
- less likely, Citigroup will hit new highs in the next few weeks and this option will start to show a loss. In this situation hopefully that loss should be offset by a gain in the leveraged long ETF position.