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Tuesday, August 11, 2009

Two Citigroup Income Generating Option Strategies

As you can see from the top ten most active option contracts traded, which is posted daily on OptionMaestro.com, Citigroup Inc. (NYSE:C) option contracts seem to be among the most active and near the top everyday; which makes them extremely liquid. Therefore I decided to write about a couple strategies that can be used on Citigroup to create monthly income. In order to use the option strategies outlined below you must be willing to hold Citigroup stock, as if the call options do not get "called out" the stock will be held after expiration, and if the put options get "put to you" the stock will also be held after expiration. This post requires the knowledge of stock options. To learn more about the risks, pricing, calculations, strategies, and options in general click here.

Reason for choosing Citigroup:
  • With high volatility on the underlying and extremely high implied volatility, the premiums on Citigroup are much higher than your average stock.
  • If we get a short-term stock market correction (with no major news on any particular financial company), Citigroup being up less than 20% compared to the other financial stocks, should not sell off as much. Looking at the Google chart below we can see that Citigroup has been left in the dust compared to Bank of America Corporation (NYSE:BAC), Goldman Sachs, Inc. (NYSE:GS), and JPMorgan Chase & Co. (NYSE:JPM).

  • The stock is within pennies of a strike price, which happens to be the $4 strike (as of Monday's close), which also makes this contract most attractive.
  • Citigroup has spent the majority of the last 6 months between 2.60 and $4 a share (see chart below). We can see that Citigroup has had a very tough time getting through $4 a share, so if it can get above $4 and hold, it will become a serious support for Citigroup. Assuming Citigroup will trade in a tighter range in the months to come, support at $4 would put a nice floor in for the option strategies outlined below, as the 4 strike can be used month after month for generating income.

Option Strategy #1: Buy Citigroup stock and sell the August 4 call option. The premium received will protect to the downside by 5.08%, and if the stock is assigned at options expiration this position will yield 6.60% (in 11 calendar days). If this stock sells off by greater than 5.08% by options expiration the position will be down, but Citigroup can be written out again for the September 4 call option lowering the cost on the stock even more. If Citigroup goes up significantly past $4 a share, it may be best to roll the option forward by purchasing back the August 4 call option, and writing a 4 September call option or even the October 5 call option, depending on the price and premium received.

Option Strategy #2: Sell the Citigroup August 4 put option. The premium received will allow for a profitable position as long as Citigroup does not close below $3.69 a share at August options expiration. For maximum profit, Citigroup must close at or above $4 a share at expiration, if it does this position will return 5.00%. If Citigroup closes below $3.69 a share at August expiration, again rolling the position on Friday August 21 for the September 4 put option would be a good idea (in my opinion).

These are just some examples and not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (click here to see annual options volume chart).

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