Citigroup is a high-dividend stock that just broke back above the all-important 200-day moving average.
Citigroup stock has gained 8.9% in the last five days following an earnings report that surpassed analysts estimates.
The investment bank and financial services firm is undergoing major restructuring with a plan to cut 20,000 jobs and streamline core business operations.
Citigroup Cash-Secured Put Trade
Citigroup stock has stable price action and consistent dividends. Those attributes can make Citigroup stock attractive to investors looking for reliable income rather than chasing high-volatility trades. One way to take ownership of a stock for less than the current price is via a cash-secured put option trade.
Let's take a look at how a cash-secured put trade might look on Citigroup stock.
As a reminder, a cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price. It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
Exploring Sale Of June 20 Put Option
Let's assume we're happy to buy 100 shares of Citigroup stock at a price of 65 any time between now and June 20.
Selling a June 20, 65-strike put generated around $210 in premium this morning. The put seller has the obligation to purchase 100 shares of Citigroup stock at 65 if called upon to do so by the put buyer.
The break-even price for the trade can be calculated by taking the strike price less the premium received. In this case, that gives a break-even price of 62.90, which is 7.9% below Monday's closing price.
If Citigroup stock stays above 65 at expiry, the put expires worthless leaving the trader with a 3.3% return on capital at risk. That works out to around 23% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade will suffer a loss. However, the loss will be partially offset by the premium received for selling the put.
The maximum loss on the trade would occur if Citigroup stock fell to $0. Such action would see the trade lose $6,290 but most traders would cut their losses before then.
Benefit Of Cash-Secured Puts
Cash-secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own.
If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
According to the IBD Stock Checkup, Citigroup is ranked No. 17 in its group and has a Composite Rating of 76, an EPS Rating of 80 and a Relative Strength Rating of 64.
Citigroup has already reported first-quarter earnings, so there should be no earnings risk with this trade.
It's important to 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 and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
