Citigroup (C) may present investors with a great money making opportunity because of the problems going on in Europe. How often have we seen the markets go down on account of fear because of European woes and then they reverse direction on news that turns out to be good with what amounts to an attempted fix of financial troubles. Cyclical stocks like energy and financials are likely to climb on the sign of progress in tackling Europe's debt issues. And this is a play we can set ourselves up for.
I stumbled across with a very interesting tool by Citi. Toby Levkovich created a proprietary Panic/Euphoria model that he recently updated that measures extremely bullish and bearish positions in the stock. In his updated model it appears the 'panic' level is high and that makes the stock a good bullish candidate.
(Click to enlarge)
Does it work? Well, pack in 2007 and 2008 it inched its way up into the euphoric zone. The difference between then and today is that investors are far more defensive. A couple years ago it signaled an 84% chance of the SP 500 falling in the next 12 months and presently it signals a 96% chance of making money in the next year. Then it predicted a 98% chance of double digit return on stocks last October-it was right. Now it is saying that investors should be bullish on Citigroup! Maybe we should position ourselves!
The stock has won some respect lately as it has reworking itself into a safer lending institution. Citigroup's decision to not seek approval to return more capital to shareholders this year was a very prudent move on its part. Investor confidence is very important right now and its board is determined to avoid as much extra risk as possible. They are moving in the right direction.
The stock is presently trading at 26.52 and I believe it won't take long for European news to change on action and the markets rebound. Citigroup is doing well I believe investors can position themselves for an income play on the next rally. Presently, a positive divergence exists between the last two lows in the RSI and the daily chart. This could be signaling that the drop is weakening and we could look for a move up. This is what we are positioning ourselves for.
(Click to enlarge)
The Options Play
- Buy a November 2012 call with a strike of '27' (priced at $3.25)
- Sell a November 2012 call with a strike of '28' (priced at $2.77)
- Net Debit to Start: $0.48
- Maximum Profit: $0.52
- Maximum Risk: net debit
- Maximum Length of Trade: 6 months
Reasoning behind the Trade
- The company is showing good stewardship that will attract investors on a good economic note.
- Financials always climb on European news of progress.
- The market will turn up a bit and Citigroup is well positioned to make a move on JP Morgan's (JPM) folly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
