The recovery is on its way and many banks, whether they were ones that got bailed out or not, are looking like profitable investments again, maybe. Trading banks might just be profitable as the banking industry continues to sort itself out on the long tail end of this recession. The damage done to banks by the recession and the damage they did themselves with bad loan portfolios is evident in a stock like Citigroup. Citi stock is stuck around $3 a share when it used to trade around $100. It is not totally clear if this company falls in the trading catchups column or should be filed under creating a game plan for trading market recovery. This company has the world?s largest financial services network throughout 140 countries. It also was bailed out by the US government which holds a 36% equity stake in the company. Options traders are happily selling calls on the stock with little concern that it will rise more than 30% in the next year.
More and more it would appear that in trading the rallies and retreats of the stock market that Citi has been left behind. Certainly that is the belief of those trading banks who are selling calls on this huge company. The concern for sellers of calls on this stock is that if the company gets its act together and the economy jumps a little Citi could show profits and jump up in price. Then those trading banks would be scalping profits on the way up. It would not have to go anywhere near anywhere near its previous highs to do serious damage to options traders who did not have a strategy for hedging their bets.
Citi could be a good place to consider the use of straddles in the recovery market. Currently puts and calls can be had for Citi of a penny a share, namely $1 for a contract. A traditional long straddle would be to buy both a call and a put at the current price, expecting to profit with substantial movement up as well as down, although at $3 a share there is not a long way to go on the downside.
Another option in trading the likes of Citi would be to buy calls and sell puts. This strategy in trading banks assumes that Citigroup really cannot fall any more in price. Thus the risk is, hopefully, minimal for a loss on the put and its premium will counter the price of a call option on the high side. The sad part about Citi at this point is that there are no standard options being offered above $7 a share but calls at $4, $5, $6, and $7 are all selling for a penny a share so the price is right. One of the things protecting Citigroup on the downside is the matter of high cost of entry businesses during the recession. Citigroup is a huge company with assets around the world. For someone to come in and take them on world wide would take a huge investment in resources, manpower, and expertise. This could well be why Citi stock still sells at just over $3 a share as traders realize that Citi, even though it is limping along, will probably not go away. Other US big banks to look at are Wells Fargo, JP Morgan Chase, and Bank of America. As usual we are trying to get you to trade Citigroup or to neglect it, simply to have you look at the possibilities of making a profit trading banks or other stocks and options as the market slowly recovers.
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