FThe first quarter earnings season is about to begin—And investors with long-term horizons should consider using short-term options strategies to profit from the spread of exuberance – starting with
The anticipation is particularly high for banks and brokerage houses, who should get perhaps the best of all possible worlds for their businesses.
Consider Citigroup (ticker: C), which is expected to release its results on April 15, offering investors a chance to pass judgment on what has been a slew of positive media reports. CEO Jane Fraser, which took over in February.
Now is her time to win or lose, and she will likely benefit from the doubt.
(REV), instead of a much smaller amount, and he couldn’t get most of the money back.
Despite these problems, Citigroup stock significantly outperformed the
S&P 500 Index
over the past year. It reflects a widely held view that banks will thrive in an environment characterized by low interest rates, rising yields and an increasingly healthy economy that is preparing to emerge from the Covid-19 pandemic. The title has suffered a bit since mid-March, but it’s probably just a hiatus.
Risk reversal – i.e. selling a put and buying a call with a higher strike price but same expiration – positions investors to buy the stock when weak and to profit from any rally. . The strategy also expresses confidence that Fraser, a veteran of Citi, has a plan and the institutional knowledge to make it work in a sprawling society. The trade generated a 15 cent credit while the stock was at $ 72.69.
If the stock is at $ 80 at expiration, the call is worth $ 5 and investors can keep the premium received for selling the put option. If the share price is at or below the put strike price, investors can buy the stock at the put strike price or adjust the position in the options market.
Over the past 52 weeks, Citigroup’s stock has fluctuated from $ 38.75 to $ 76.13. Stocks are up about 18% this year, compared to around 9% for the S&P 500. Stock is up 64% in the past year, compared to 55% for the index.
Good stock returns generally indicate that investors need to be careful. But there’s another tailwind forming behind the banks: The Federal Reserve seems more optimistic about the sector than it has in years.
Since the 2007-09 financial crisis, the Fed has required banks to store enough capital to survive major economic calamities. The central bank stepped up pressure on banks last year, when it forced them to stop share buybacks and cap dividends. But he recently indicated that he alleviate these restrictions linked to the pandemic after June 30, provided that banks pass their annual stress tests.
More accommodative central bank supervision would help many big banks, and such a move could prove extraordinary for Citigroup – especially if Fraser announces plans to streamline the operations of the big international bank.
If all of these disparate forces come together when Citigroup reports earnings – or if investors just think they might come together soon – the stock should behave vigorously. And if the thesis turns out to be wrong, and the stock weakens, don’t worry. The environment is increasingly constructive for banks, Citi offers a reasonable dividend yield of 2.8% and time is on your side.
Steven M. Sears is President and Chief Operating Officer of Options Solutions, a specialty asset management company. Neither he nor the company has a position in the options or the underlying securities mentioned in this column.
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