Many banks look like they are finding resistance at moving average lines with Citigroup among them. Here's a bearish option strategy on C stock that can help reduce your risk by offsetting market exposure.
Weakness In C Stock Prompts Bearish Stance
C stock popped onto my radar as it broke back below its 21-day moving average.
That's typically a bearish development and it led me to check the IBD Stock Checkup. C stock is ranked No. 14 in its group and has a Composite Rating of 38, an EPS Rating of 69 and a Relative Strength Rating of 24. The weak ratings are what I'm looking for when scouting for bearish option trades.
Today, let's look at setting up a bearish diagonal put spread.
For Citigroup stock, I looked at a May 20, 57.50 put to buy for around $4. I'd sell an April 14, 52.50 put for around $0.60.
The total cost of the trade is the net premium paid, estimated to be around $3.40 per share or $340 for a standard contract of 100 shares.
The net delta on the trade is -89 so the exposure is roughly equivalent to being short 89 shares of C stock. It's important to note, this will change as the stock moves and the trade progresses.
The strategy earns the most profit if C stock closes right at 52.50 at April expiry. Estimated profits would be around $230 per contract at that price.
If C stock drops even further, the trade will still make around $200.
Managing The Trade
Citigroup is due to report earnings on April 14 before the market open. I would aim to close the trade before then.
What if I'm still bearish on C stock at the April 14 expiration? Well, I still have another month on the long put and can hold it. Or to bring in some more premium, I could sell another monthly put against it to bring down my cost basis even more.
In terms of risk management, a stop loss of 20% makes sense. If the trade is down roughly $100, I would close it out.
Adding some bearish trades to your option portfolio can help offset the risk of other bullish trades and neutralize your overall market exposure.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
