Two Citigroup Income Generating Option Strategies 22 comments
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As you can see from the top ten most active option contracts traded, which is posted daily on OptionMaestro.com, Citigroup Inc. (C) option contracts seem to be among the most active and near the top everyday; which makes them extremely liquid. Therefore I decided to write about a couple strategies that can be used on Citigroup to create monthly income. In order to use the option strategies outlined below you must be willing to hold Citigroup stock, as if the call options do not get "called out" the stock will be held after expiration, and if the put options get "put to you" the stock will also be held after expiration. This post requires the knowledge of stock options. To learn more about the risks, pricing, calculations, strategies, and options in general click here.
Reason for choosing Citigroup:
- With high volatility on the underlying and extremely high implied volatility, the premiums on Citigroup are much higher than your average stock.
- If we get a short-term stock market correction (with no major news on any particular financial company), Citigroup being up less than 20% compared to the other financial stocks, should not sell off as much. Looking at the Google chart below we can see that Citigroup has been left in the dust compared to Bank of America Corporation (BAC), Goldman Sachs, Inc. (GS), and JPMorgan Chase & Co. (JPM) (click chart to enlarge).
click to enlarge
- The stock is within pennies of a strike price, which happens to be the $4 strike (as of Monday's close), which also makes this contract most attractive.
- Citigroup has spent the majority of the last 6 months between 2.60 and $4 a share (see chart below). We can see that Citigroup has had a very tough time getting through $4 a share, so if it can get above $4 and hold, it will become a serious support for Citigroup. Assuming Citigroup will trade in a tighter range in the months to come, support at $4 would put a nice floor in for the option strategies outlined below, as the 4 strike can be used month after month for generating income (click chart to enlarge).
Option Strategy #1: Buy Citigroup stock and sell the August 4 call option. The premium received will protect to the downside by 5.08%, and if the stock is assigned at options expiration this position will yield 6.60% (in 11 calendar days). If this stock sells off by greater than 5.08% by options expiration the position will be down, but Citigroup can be written out again for the September 4 call option lowering the cost on the stock even more. If Citigroup goes up significantly past $4 a share, it may be best to roll the option forward by purchasing back the August 4 call option, and writing a September 4 call option or even the October 5 call option, depending on the price of the stock and the premium received.
Option Strategy #2: Sell the Citigroup August 4 put option. The premium received will allow for a profitable position as long as Citigroup does not close below $3.69 a share at August options expiration. For maximum profit, Citigroup must close at or above $4 a share at expiration, if it does this position will return 5.00%. If Citigroup closes below $3.69 a share at August expiration, again rolling the position on Friday August 21 for the September 4 put option would be a good idea (in my opinion).
These are just some examples and not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.
The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (click here to see annual options volume chart).
Disclosure: Long BAC, C, GS; Short C August 3 Call options, C August 4 Call Options.
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The problem I have with your thinking here is that you are writing about an income strategy.
In my way of thinking, when you sell calls and puts you have only opened a position. You do not generate any "income" until the position is closed or traded, premiums are kept and the original capital is intact, (in the case of buy/write). Rolling calls and puts forward is a pull back from the original position, at a loss, and living to fight another day. Nothing wrong about that escape hatch, I have used it more than once but it is not generating income.
thanks for expanding on it thoroughly......
On Aug 11 08:49 AM jamo59 wrote:
> agree with acttang...rather amateurish........if you want those buy/write
> returns, do it with dozens of much more enticing stks.....
> jack
On Aug 11 08:49 AM jamo59 wrote:
> agree with acttang...rather amateurish........if you want those buy/write
> returns, do it with dozens of much more enticing stks.....
On Aug 11 08:53 AM jamo59 wrote:
> calvin has it spot on correctly~~
> thanks for expanding on it thoroughly......
>
> On Aug 11 08:49 AM jamo59 wrote:
On Aug 11 08:53 AM john s. gordon wrote:
> if citi has been left in the dust compared to the others, there is
> probably a reason.....
Stocks that fall 90% within a year, or rise 500% in the same period, will tend to have huge amounts of volatility, with options priced accordingly.
What the author does not mention is that any strategy utilizing C will wildly fluctuate. It is easily possible, for instance, that with strategy #1, you may find yourself selling all of your C stock for a 20% pop (or the author's 5%, lol). That may sound good, but I would not be surprised if C popped 50% in any one direction at any given time (in the short term, which is what this article is about).
It is easily possible that if you follow strategy #2 you may end up holding a large amount of C stock. Sure, the price will be very attractive, but you must take into consideration that you WANT TO HOLD C STOCK before you do this.
Furthermore, neither of these two strategies are real hedges. With #1, your downside protection is very limited (5%, on C??), and with #2, your upside is only 5% on secured cash. You got to be kidding me...
Options are DERIVED from the underlying holding, and you must rationalize whether or not you actually want anything to do with C before you begin collecting premiums. For a 5%, 1/2 month pop, it may seem interesting, but there are two big catches:
1) No one has any real idea what C will do in the short term
2) C has just gained nearly 60% in the past 3 weeks. It may easily drop the same amount before this month's expiration. Or, it may surge another 100% before then. You trade this in for a 5%, 50/50 non-certainty.
These strategies, while conservative by nature, throw it all away because the underlying security is wildly speculative. A sheep in wolf's clothing is still a sheep.
seekingalpha.com/artic...
If any position with options should be held in C, it should be long LEAP calls, hail mary...the short side is too limited to make an effective play. That matches with C's risk profile...this stock (nor anything derived from it outside of a pure hedge) is not for the faint of heart.
On Aug 12 10:37 AM 19709 wrote:
> Marco's point in using C is its high volatility. Coupled with the
> fact that the U.S. Government is more than a > 30% owner of C and
> consequently cannot afford to let it fail, generating a 6%+ "dividend"
> in 11 days is extremely enticing. Also remember than Marco is trying
> to educate individuals who may never have traded options.
On Aug 12 11:02 AM Ricard wrote:
> That high volatility kills his strategies as well. High volatility
> equates to fat premiums, but you STILL must be correct in direction
> if you use either of Marco's strategies. For a 5% gain, his strategies
> are far too risky for the infinitesimal returns he is suggesting
> you accept.
seekingalpha.com/artic...
. . . your own article in which you state the reasons for the "not faint of heart" to trade options on C.
On Aug 12 11:02 AM Ricard wrote:
> That high volatility kills his strategies as well. High volatility
> equates to fat premiums, but you STILL must be correct in direction
> if you use either of Marco's strategies. For a 5% gain, his strategies
> are far too risky for the infinitesimal returns he is suggesting
> you accept.
Just because you conservatively gamble, doesn't mean you're no longer gambling. You can put all sorts of mechanisms in place, but in the end, if the dealer has the advantage in odds (which he definitely does here, 50/50 odds for a 5% gain), then you better makes sure the payoff is accordingly large. Covered calls and cash-secured puts alone are probably the worst strategies you can use for such a volatile stock as C.
On Aug 12 03:13 PM 19709 wrote:
> For further justification of Marco's suggestions, I refer you to.
> . .
> seekingalpha.com/artic...
>
> . . . your own article in which you state the reasons for the "not
> faint of heart" to trade options on C.
>
>
What will more than likely happen is that 50% of the time, he makes his 6%, and 50% of the time he is forced to cover. Short term trades like this tend to have nothing to do with the underlying situation of the stock, so the rest of your comment is irrelevant to the trade. What IS relevant is the volatility, so when he's forced to cover, he'll probably have to cover for well over 6%, making annualized attempts at this trade a total disaster waiting to happen.
On Aug 12 03:04 PM 19709 wrote:
> Let's see - 6% gain in 11 days equates to an annualized gain of 199%.
The odds are not in favor of making the trade Marco suggests, unless you have a crystal ball that can predict daily/weekly movements of any stock. I'm sorry, but mine broke last week, so I'm using LEAPs instead, and buying calls, not writing them.
On Aug 12 07:30 PM Ricard wrote:
> What IS relevant is the volatility, so when he's forced to cover,
> he'll probably have to cover for well over 6%, making annualized
> attempts at this trade a total disaster waiting to happen.
Strategy is good, but the underlying security is not.
On Aug 12 07:44 PM Ricard wrote:
> One clarification, when he writes his covered calls, instead of being
> 'forced to cover' he is instead forced to eat the losses garnered
> through holding C. Like I already mentioned, for a stock this volatile,
> losses over 11 days can easily get into the high teens, if not 30-40%,
> without any news, or any rhyme or reason causing the swings in price.
> So, he keeps his 6% premium and loses the farm. This will probably
> happen 50% of the time if he chooses to 'annualize'.
>
> The odds are not in favor of making the trade Marco suggests, unless
> you have a crystal ball that can predict daily/weekly movements of
> any stock. I'm sorry, but mine broke last week, so I'm using LEAPs
> instead, and buying calls, not writing them.
I hope you're not putting up a lot of funds for this transaction...on the event that what I mentioned comes to pass (a near certainty, unless C moves upwards with not even a hint of a correction, in which case my LEAPS would have far outdone several months of your 2 week calls), you'll find yourself eating very large losses on your C holdings.
Regardless, I'm not here to rain on your parade...only to warn you that people taking Marco's advice here have only considered one direction of this trade, and if you saw the potential downside, you would demand a much, much higher return than 6% over 11 days. Good luck on your trades.
P.S. If C goes to $4.50 or higher before expiration, I'd ask yourself again if your premium was worth it. You would have sacrificed the benefits of high volatility (large upswings in price) while offering yourself a tiny sliver of protection against similarly large downswings in price. But, I'm repeating myself, and I can clearly see you are set on your agenda. Again, good luck.
On Aug 13 12:23 PM 19709 wrote:
> Let's see. I bought the stock on 8/11 for $3.72. Today (8/13) I
> sold August $4 calls @ $0.21 and expect to be called at expiration.
> Before commissions, that would be a return of 13%+ in 11 days. After
> commissions, the 11 day return would be 12%+. If C closes below
> $4 at expiration, I will have lowered my per share cost to $3.53
> after commissions and will write calls again.
"Option Strategy #1: Buy Citigroup stock and sell the August 4 call option. The premium received will protect to the downside by 5.08%, and if the stock is assigned at options expiration this position will yield 6.60% (in 11 calendar days)."
Today, C closed at $4.69. By buying C and selling the call @ 4, you've traded in a near 30% gain on the stock for a 6.6% premium. Had the stock closed at $3, (same amount of volatility, except in the opposite direction), you would have eaten a net loss of around 20%.
This proves my point that writing covered calls / cash secured puts on a stock with C's volatility and risk profile is foolhardy. Again, I reiterate that unless you are aiming for a perfect hedge, the correct trade is to buy long calls or puts, since that will match the huge amount of volatility inherent in C.
Good luck next month.