A Low-Risk Citigroup Earnings Trade

Jan. 3.12 | About: Citigroup Inc. (C)

Citigroup, Inc. (NYSE:C) is scheduled to report earnings on January 17, 2012, before the market opens. Citigroup over the past few years has become a volatile stock. In the past, I would never trade this company as an earnings play, but the times have changed.

Currently, Citigroup is trading at $26.31/share. The 52-week range is $21.40 - $51.50.

52wk high: 51.50
52wk low: 21.40
EPS: 3.72
PE: 7.10
Div Rate: 0.04
Yield: 0.152033
Market Cap: 76.92 B
Volume: 26.21 M
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The trade i am going to initiate is the 'reverse iron condor' spread. This trade, with the strike prices I am using, is extremely low risk. The potential payout is not earth-shattering, but should be an easy winner.

The 'reverse iron condor' spread is a neutral options strategy that is placed with a net debit instead of a net credit to the buyer, and can be placed with a lower level trading account. Most brokers will let you place this trade if you are approved with a Level 2 or Level 3. Please check with your broker, and if not approved, you can also request to be upgraded.

This trade is a limited risk, limited profit strategy. Yet, there is a very healthy return awaiting if the stock should make even a modest move after reporting earnings.

Here is how the 'reverse iron condor' trade is placed accurately, using only one contract each for explanation purposes:

Reverse Iron Condor Construction

  • Buy 1 OTM Put
  • Sell 1 OTM Put (Lower Strike)
  • Buy 1 OTM Call
  • Sell 1 OTM Call (Higher Strike)

Here is how I will be placing the trade. The 'reverse iron condor' has four legs. (Note: you can increase or decrease the number of contracts to suit your preferred investment in the trade):

  • Buy (10) C January 2012 $26.00 strike put options
  • Sell (10) C January 2012 $25.00 strike put options
  • Buy (10) C January 2012 $27.00 strike call options
  • Sell (10) C January 2012 $28.00 strikecall options.

The current bid/ask price to place this trade is $0.71 - $0.78.

Requirements

Cost/Proceeds $740.00
Option Requirement $0.00
Total Requirements $740.00
Estimated Commission $50.00
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Current Price: $26.31

Price Profit / Loss
18.75 $260.00
21.87 $260.00
25.00 $260.00
25.15 $108.00
25.26 $0.00
26.00 ($740.00)
27.00 ($740.00)
27.74 $0.00
28.00 $260.00
28.43 $260.00
35.00 $260.00
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Since Citigroup is not a major price mover after reporting earnings, this trade makes a lot of sense. You can change the strike prices to your preference for a higher profit if you think the stock will move more than what I have listed. For example, here is what the profit/loss chart will look like using 25/24/28/29 strikes prices instead of 26/25/27/28.

Current Price: $26.31

Price Profit / Loss
18.00 $500.00
21.50 $500.00
24.00 $500.00
24.50 $0.00
25.00 ($500.00)
25.19 ($500.00)
28.00 ($500.00)
28.50 $0.00
28.88 $376.00
29.00 $500.00
36.25 $500.00
Click to enlarge

Requirements

Cost/Proceeds $500.00
Option Requirement $0.00
Total Requirements $500.00
Estimated Commission $50.00
Click to enlarge

Finally, here is another variation that can be used on this Citigroup trade with 24/23/29/30 strike prices and the profit/loss chart:

Current Price: $26.31

Price Profit / Loss
17.25 $660.00
21.14 $660.00
23.00 $660.00
23.66 $0.00
24.00 ($340.00)
25.23 ($340.00)
29.00 ($340.00)
29.32 ($22.00)
29.34 $0.00
30.00 $660.00
37.50 $660.00
Click to enlarge

Requirements

Cost/Proceeds $340.00
Option Requirement $0.00
Total Requirements $340.00
Estimated Commission $50.00
Click to enlarge

Disclosure: I am long C.