On the 14th of August, we wrote an article advising readers to sell puts on Citigroup (NYSE:C) with the intent to either get in at $26 or earn 11% in roughly six months. We also provided a strategy that individuals could use to further leverage their position. The strategy entailed using some or all the proceeds obtained from selling the puts to purchase calls. We suggested the Jan 2013, 33 calls. On the 14th of September, those calls at one point were over $2.00 in the money. The puts on the other hand, have lost over 60% of their value since they were sold roughly two months ago. The stock traded as low as $28.31 on the 16th of August and in doing so triggered the suggested play into action. The strategy was to purchase the Jan 2013, 28 puts when the stock traded down to the $28.00-$28.50 ranges.
On the 14th of August we put up the above chart and made the following comments.
The stock has put in a nice double bottom formation, broke past resistance in the 28 ranges and has managed to trade above its downtrend line. As long as it does not close below 24.60 on a weekly basis the outlook will remain neutral to bullish. However, as long as it manages to stay above 28, the short-midterm outlook will be bullish and it has a good chance of trading to 32-33 ranges before pulling back. In the short term it could test the 28 ranges, former resistance turned into support before trending higher.
The stock did not close below $26.40 on a weekly basis, and neither did it close below $28.00. In staying above 28.00 it maintained the bullish outlook and as suggested it traded to the $32-$33 ranges. It actually managed to trade past $35 before it pulled back, exceeding our initial targets.
Current Technical outlook
The stock is consolidating after trading as high as $35.25 and could test the $31.00-$31.50 ranges before breaking out again. As the trend is strong, a weekly close above $35 should easily lead to a test of the $37.00-$38.00 ranges. The stock has the potential to put in a series of new 52-week highs before topping out.
Charts of interest
If the stock manages to close above the EPS consensus line, the pace at which the stock appreciates could pick up significantly. In general, the trend strengthens when the stock is trading above the EPS consensus line.
A look at the Competition
A look at what the puts are doing right now
On the 16th of August, the stock traded down to $28.31, which fell within the suggested trigger points of $28.00-$28.50. The options were trading in the $2.81-$2.84 ranges and the stock the stock was trading roughly at $29.00 when the article was put out. Thus, the options should have at least traded at $3.00 when the stock dropped down to $28.31. For each contract sold, $300 was deposited into your account.
The Jan 2013, 29.00 puts are now trading in the $1.14-$1.15 ranges. In roughly two months the options have lost over 60% of their value. As the stock is a strong up trend, the next move is likely to take it past the $37 ranges and possibly as high as $38.00. In our opinion, individuals should hold this position at least until the stock trades to the $37.00-$38.00 ranges. At that point, the position can be closed out as the puts should be worth almost nothing.
In the same article we offered the following suggestion to boost one's potential gains.
A suggestion to boost your potential gains
Take some of the premium you received from the puts you sold to purchase some out of the money calls when and if the stock trades to the suggested ranges. For example, you could purchase the Jan 2013, 33 calls. Using the money you received from the puts you sold provides you with the chance of leveraging your position for free as you are not paying for the calls.
Readers who took this advice should be sitting on some rather lofty gains as the Jan 2013, 33 puts are almost in the money. On the 14th of September, at one point they were over $2.25 in the money. At that point traders could have probably banked close to 100% in gains as the stock had rallied roughly $7.00 from the suggested entry ranges of $28.00-$28.50.
The puts have lost over 61% of their value since they were sold. We would continue to hold these puts as the stock appears to be poised for another leg up. After trading as high as $35.25 it is letting out some steam before the next run up. It is still consolidating and could drop down to the $31.00-$31.50 ranges over the next 1-2 weeks. A weekly close above $35.00 should set the path for a test of the $37.00-$38.00 ranges with a strong possibility that it could go on from there to put in a series of new 52-week highs. We would consider closing the put out, the moment the stock trades to the $37.00-$38.00 ranges as the puts should be worth practically nothing by that time.
Those who followed the suggested strategy to boost their returns by using the proceeds from the sale of the puts to purchase some Jan 2013, 33 calls should be sitting on some rather nice gains. On the 14th of September, these options were at one point in time over $2.00 in the money. At that point, the calls should have been showing gains of at least 100%. If you did not take some money of the table at that point in time, then consider closing half the position the moment its showing gains of roughly 100%. Traders can hold the other half for a possible test of the $38.00 ranges.
EPS charts obtained from zacks.com. Options tables sourced from yahoo finance.com. Competitor data sourced from yahoo finance.com
It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was prepared for Tactical Investor by one of our analysts. We have not received any compensation for expressing the recommendations in this article. We have no business relationships with any of the companies mentioned in this article.