The market is so amazing. There are so many moving parts and subplots happening at the same time that is making this market so incredible to trade right now. There are people losing their shirts and there are the others making a killing. It’s that simple.
The Dow managed a furious comeback in the final hour of trading as the cat got let out of the bag on who President elect Obama would likely nominate for treasury secretary. His name is Timothy Geithner and he was responsible for the 500 point pop in the Dow. Wall Street cheered the New Yorker’s current role and pushed the Dow above 8k to 8,046. The Nasdaq jumped 68 points to finish at 1,384 while the S&P 500 surged 47 points to close at 800 on the button.
The one story I want to jump right into is Citigroup (C, $3.77, down $0.94). Remember on Tuesday when I said “let’s see how this one turns out”? Citigroup had just issued a “Buy” rating on AutoZone (AZO, $92.41, up $3.32) which hit a low of $84.66 today when the stock was at $104.
I questioned the “analyst upgrade” because Citigroup was a $9 stock and had been sinking like the Titantic yet AutoZone was at a serious technical breakdown. Yeap, we made some dough with the AutoZone put options but the real deal has been Citigroup. There was a fortune being made this week as Citigroup dropped from $9 to $3 in just three days. Think about that for a second. Citigroup was a $20 stock just six weeks ago.
So here is the dilemma with Citigroup. Can you trust it? My take is that Citigroup will survive because it is part of the “good ‘ol buddy” system. Citigroup was one of the nine initial banks to sell preferred stock and warrants to the government last month. They also received $25 billion in the process which happens to be more than the company’s current market value right now. How crazy is this getting?
Here’s the kicker. The November options expired today but there was plenty of trading in the December contracts. The December 5 calls (CLP, $0.94, down $0.31) saw 100,000 contracts trade hands. That is phenomenal. Period.
If you bought 10 of these call options today then basically you have entered into a lottery ticket. Ten contracts would have cost under a $1,000 although the calls did trade to a low of 60 cents when the stock hit $3. So let’s say $600 if you had bought at the low.
Now, if Citigroup can rally, which to be quite honest could, then the calls could see some super-duper returns. The contracts expire on December 19 and if the stock can rally to $6 then the calls would be worth $1. If you got in at 60 cents that’s a 67% return. If you got in around a buck, you break even.
But what if Citigroup can get back to $7 or $8? At $7, you got a double on your investment, at $8 your return is 200% if you’re in at $1. If the stock is under $5, you lose your entire investment. Of course the returns or losses could come quicker depending on the outcome but that is how playing these call options will shake out.
You can bet I’ll be following this one.
Rick Rouse
Rick@OptionsMentoring.com
