Citigroup stock is set to report results next Tuesday before the opening bell and the options market is pricing in a 4.8% move in either direction. Let's look at selling a cash-secured put to take advantage of the high implied volatility around the global financial services company's earnings announcement.
A cash-secured put involves selling 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 take assignment and acquire the stock below the current price.
The move is similar to a covered call and is easy to understand once you know the basics. It's important that anyone selling puts understands that they may be assigned a contract of 100 shares at the strike price.
For Citigroup stock, a trader selling the July 18 put with a strike price of 83 will generate around $85 in premium per contract. The put has a delta of 25, which means there is an estimated 75% chance that it will expire worthless.
Citigroup typically trades with implied volatility around 20%-25%, but the volatility on this short-term put option goes up to 38%.
How The Cash-Secured Put Works With Citigroup Stock
The put seller would have the obligation to purchase 100 shares of Citigroup stock at 83 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 brings a break-even price of 82.15, or 4.8% below Monday's closing price.
If the stock stays above 83 at expiry, the put option expires worthless. That leaves the trader with a 1.03% return on capital at risk in just over one week. That works out to 34% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss. But investors partially offset the loss via the premium received for selling the put.
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own. With this example, the trader either generates a 1.03% return in one week, or gets to purchase Citigroup stock at a reasonable discount on the current price.
If Citigroup trades below 83 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
Citigroup: Serving 200 Million Customers
A financial titan on Wall Street, Citigroup offers banking, credit, investment, brokerage, and wealth management services to consumers, businesses, and institutions. It serves about 200 million customers across more than 160 countries in all regions of the world.
Under Chief Executive Jane Fraser's leadership, Citigroup has undergone significant restructuring. It now focuses on five core divisions and plans to exit consumer markets in 14 countries. This strategic shift aims to streamline operations and improve profitability.
Goldman Sachs recently increased its price target for Citigroup to 96 from 85, indicating confidence in the company's growth prospects.
According to Investor's Business Daily's IBD Stock Checkup, Citigroup ranks eighth in its group. It has a Composite Rating of 92, an Earnings Per Share of 80 and a Relative Strength Rating of 90.
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 also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
