Monday, May 6, 2013

Putting A Short Call in Citigroup Back in Place

As discussed here CCI has a long position in the financial sector etf (xlf) via the Jan 15 $10 Call, that has usually been hedged via a shorter duration short call in Citigroup (C).

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Yes, it was just last week Citigroup was down 3% and as discussed here  CCI was removing a short call in Citigroup. "Surprisingly"  the "rationale market" seemed to "change its mind" over the last few days and Citgroup retraced the recent downdraft back to near its recent highs.  Hence CCI re-opened a short call position in Citigroup.  This time with Citigroup selling just over $47.50, CCI sold the June $50 call for a $.56/contract credit.

Some potential outcomes.
  • Citigroup breaks out and trades up over $50.56 (up another 6+%).  In this situation this option position will start to lose money. Of course, CCI believes it is highly probably if that were to happen, the Jan 15 XLF $10 calls the portfolio is long will be showing a nice leveraged profit to more than offset this loss. (As a reminder, XLF and C are highly correlated and in fact C makes up 6% of XLF)
  • Citigroup stalls/falls - Likely the long position in XLF will also stall/fall but the option premium collected via this trade will act as a hedge and soften the overall blow. 
  • In an ideal situation for this position,  Citigroup and XLF will continue to rise, but Citigroup stalls at/below $50 (i.e. round number resistance). This would result in the portfolio harvesting all/most of this premium while the long position in XLF also likely grows in a leveraged manner

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