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Citi Disappoints – A Bearish Look at the Financial Sector

Citi (C) was down nearly 3.5% today despite beating analysts’ estimates. Overall, the company raked in $2.4 Billion last quarter. Unfortunately this is nearly 60% lower than the same quarter last year.

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Expecting to only return around $0.44 a share, the Citi stock managed to earn $0.47 a share. CEO Charles Prince said in a statement, “”This was a disappointing quarter, even in the context of the dislocations in the subprime mortgage and credit markets. A significant amount of our income decline was in our fixed-income business, where we have a long track record of strong earnings, and this quarter’s performance was well below our expectations.”

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There are rampant rumors in the financial press about Charles Prince’s CEO life-expectancy. Jim Cramer made comments stating the CEO would likely be out by the end of this week. Possible successors may include chief financial officer Gary Crittenden, recently hired from American Express, Vikram Pandit, recently hired former Morgan Stanley, or dark horse Sallie Krawcheck who was recently moved from chief financial officer to a newly created brokerage and wealth management division. Krawcheck was long the target of analyst and investor criticism who thought she did not possess the requisite competency for the CFO post.

Where does Citi’s Stock go from here?

The blogs and financial news are awash in predictions of the current period being the eye of the lending hurricane. The theory is there were lots of exotic and interest-only loans written in 2006 and early 2007. Because the two-year period of artificially low payments on these loans has not yet expired, it is expected a fresh tide of foreclosures is on the horizon. Citi’s business model is much deeper than residential home lending, however if the housing market continues to falter it cannot be good for the company.

Earlier this month, it was reported Citi was looking to sell some of its leveraged loans to KKR Investments at below market value to hedge some of its predicted losses. The rumored loan values were reported to be as much as $170 Billion.

Looking at this news from an option trading perspective:
The news isn’t good. This could cause a long-term stock price decline or it may not. That decision is for your keen analytical sense. However, once you have decided what direction a particular stock will go, there are the mechanics of developing a coherent strategy to worry about. There is no sense in spending hours crunching numbers or in buying astronomically expensive computer software to perform the calculations.

Try PowerOptions for a free 14-day trial and see how the service can help you quickly identify the option positions that will bring your portfolio the greatest benefit should your predictions come to fruition.

Potential Trades:
If you’re taking a pessimistic view of Citi and the financial sector in general, you might start by designing a SmartSearchXL search asking for bear-put debit spreads for the sector as we have done below.

Bear Put Debit Spreads – Financial Sector





JPM 46.03 (-0.79) JPMMW 08 JAN 47.5 (96) $3.20 JPMMJ 08 JAN 50.0 (96) $4.90 $47.10 ($1.70) $48.30
JPM 46.03 (-0.79) JPMXW 07 DEC 47.5 (68) $2.65 JPMXJ 07 DEC 50.0 (68) $4.40 $42.90 ($1.75) $48.25
C 46.00 (-1.87) CMW 08 JAN 47.5 (96) $3.35 CMJ 08 JAN 50.0 (96) $5.10 $42.90 ($1.75) $48.25
JPM 46.03 (-0.79) JPMMW 08 JAN 47.5 (96) $3.20 JPMMX 08 JAN 52.5 (96) $6.80 $38.90 ($3.60) $48.90
CFC 18.20 (-0.54) CFCMD 08 JAN 20.0 (96) $3.40 CFCMX 08 JAN 22.5 (96) $5.30 $31.60 ($1.90) $20.60
C 46.00 (-1.87) CXW 07 DEC 47.5 (68) $3.00 CXJ 07 DEC 50.0 (68) $4.90 $31.60 ($1.90) $48.10
C 46.00 (-1.87) CMW 08 JAN 47.5 (96) $3.35 CMX 08 JAN 52.5 (96) $7.20 $29.90 ($3.85) $48.65
JPM 46.03 (-0.79) JPMWW 07 NOV 47.5 (33) $2.20 JPMWJ 07 NOV 50.0 (33) $4.20 $25.00 ($2.00) $48.00
CFC 18.20 (-0.54) CFCMD 08 JAN 20.0 (96) $3.40 CFCME 08 JAN 25.0 (96) $7.40 $25.00 ($4.00) $21.00
C 46.00 (-1.87) CXW 07 DEC 47.5 (68) $3.00 CXX 07 DEC 52.5 (68) $7.05 $23.50 ($4.05) $48.45
C 46.00 (-1.87) CWW 07 NOV 47.5 (33) $2.67 CWJ 07 NOV 50.0 (33) $4.75 $20.20 ($2.08) $47.92
JPM 46.03 (-0.79) JPMMJ 08 JAN 50.0 (96) $4.70 JPMMX 08 JAN 52.5 (96) $6.80 $19.00 ($2.10) $50.40
BAC 51.12 (-0.95) BACWX 07 NOV 52.5 (33) $1.90 BACWK 07 NOV 55.0 (33) $4.00 $19.00 ($2.10) $52.90
(For more details click the ticker symbol above)

All of the potential trades shown are for the month of November, December or January. All of these trades should be entered into with caution because the ‘real’ potential profit per trade is often less than $100. Even if the trade goes as predicted, brokerage fees can quickly erode the potential profit.

Also, bear put debit spreads can result in a significant loss. The loss has a limit, but this is something each investor should consider before entering the position.

If this is too risky, another option is covered puts. In the case of a covered put, the potential loss is infinite (if the stock were to take off). This is often hedged by purchasing out-of-the-money call options to cover an upward stock movement.

Competitors for JPM include: Bank of America Corporation (BAC), Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), Astoria Finan. Corp. (AF), Citizens Republic Bancorp (CRBC), Goldman Sachs Group (GS), New York Community Bancorp Inc. (NYB), Sovreign Bancorp. (SOV), United Bankshares Inc. (UBSI), U.S. Bancorp (USB), Wilmington Trust Corp. (WL), and Wintrust Financial Corp. (WTFC).
Competitors for C include: Bank of America Corporation (BAC), Deutsche Bank AG (DB), JPMorgan Chase & Co (JPM), ABN Amro Holding NV (ABN), AXA ADR (AXA), Bank of New York Co. Inc. (BK), Commerce Bancorp Inc. (CBH), CompuCredit Corp. (CCRT), Bancolombia S.A. (CIB), CIT Group Inc. (CIT), Comerica Inc. (CMA), Credit Suisse Group (CS), CapitalSource Inc. (CSE), First Marblehead Corp. (FMD), General Electric Co. (GE), HSBC Hldgs. PLC ADS (HBC), Interactive Brokers Group Inc. (IBKR), Mitsubishi UFJ Financial Inc. (MTU), Nelnet Inc. (NNI), State Street Boston Corp. (STT), Torchmark Corp. (TMK), Union Bank of California Corp. (UB), UBS AG (UBS), and Wachovia Corp. (WB).
Competitors for CFC include: Bank of America Corporation (BAC), Fannie Mae (FNM), Wells Fargo & Company (WFC), Fremont General Corp. (FMT), Indy Mac Bancorp (IMB), NovaStar Financial Inc. (NFI), Ocwen Financial Corp. (OCN), and PHH Corp. (PHH).
Competitors for BAC include: Citigroup Inc. (C), Wachovia Corp. (WB), Wells Fargo & Company (WFC), BB&T Corp. (BBT), BankAtlantic Bancorp (BBX), Boston Private Fin. Hldgs. Inc. (BPFH), CompuCredit Corp. (CCRT), Countrywide Financial Corp. (CFC), Chittenden Corp. (CHZ), Comerica Inc. (CMA), Capital One Financial Corp. (COF), City National Corp. (CYN), East West Bancorp Inc. (EWBC), FirstFed Financial Corp. (FED), First Horizon National Corp. (FHN), Fremont General Corp. (FMT), Greater Bay Bancorp (GBBK), Hudson City BCP (HCBK), Indy Mac Bancorp (IMB), J.P. Morgan Chase (JPM), Marshall & Ilsey Corp. (MI), NewAlliance Bancshares Inc. (NAL), Peoples United Fin. Inc. (PBCT), Provident Financial (PFS), Regions Financial Corp. (RF), SVB Financial Group (SIVB), SLM Hldg. Corp. (SLM), Sun Trust Banks Inc. (STI), Temple-Inland Inc. (TIN), South Fin. Grp. Inc. (TSFG), Union Bank of California Corp. (UB), U.S. Bancorp (USB), Westamerica Bancorp (WABC), Washington Mutual Inc. (WM), and Zions Bancorp. (ZION).
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

[tags] ABN, ABN Amro Holding NV, AF, Astoria Finan. Corp., AXA, AXA ADR, BAC, BankAmerica Corp., BBT, BB&T Corp., BBX, BankAtlantic Bancorp, BK, Bank of New York Co. Inc., BPFH, Boston Private Fin. Hldgs. Inc., C, Citigroup Inc., CBH, Commerce Bancorp Inc., CCRT, CompuCredit Corp., CFC, Countrywide Financial Corp., CHZ, Chittenden Corp., CIB, Bancolombia S.A., CIT, CIT Group Inc., CMA, Comerica Inc., COF, Capital One Financial Corp., CRBC, Citizens Republic Bancorp, CS, Credit Suisse Group, CSE, CapitalSource Inc., CYN, City National Corp., DB, Deutsche Bank AG, EWBC, East West Bancorp Inc., FED, FirstFed Financial Corp., FHN, First Horizon National Corp., FMD, First Marblehead Corp., FMT, Fremont General Corp., FNM, Fannie Mae, GE, General Electric Co., GS, Goldman Sachs Group, IBKR, Interactive Brokers Group Inc., IMB, Indy Mac Bancorp, JPM, J.P. Morgan Chase, MER, Merrill Lynch & Co. Inc., MI, Marshall & Ilsey Corp., MTU, Mitsubishi UFJ Financial Inc., NAL, NewAlliance Bancshares Inc., NFI, NovaStar Financial Inc., NNI, Nelnet Inc., NYB, New York Community Bancorp Inc., OCN, Ocwen Financial Corp., PBCT, Peoples United Fin. Inc., PFS, Provident Financial, PHH, PHH Corp., RF, Regions Financial Corp., SIVB, SVB Financial Group, SLM, SLM Hldg. Corp., SOV, Sovreign Bancorp., STI, Sun Trust Banks Inc., STT, State Street Boston Corp., TIN, Temple-Inland Inc., TMK, Torchmark Corp., TSFG, South Fin. Grp. Inc., UB, Union Bank of California Corp., UBS, UBS AG, UBSI, United Bankshares Inc., USB, U.S. Bancorp, WABC, Westamerica Bancorp, WB, Wachovia Corp., WFC, Wells Fargo & Co., WL, Wilmington Trust Corp., WM, Washington Mutual Inc., WTFC, Wintrust Financial Corp., ZION, Zions Bancorp., bear put debit spreads, covered call investment strategy, investment strategy, poweroptions [/tags]

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