Citigroup will report its fourth-quarter earnings on Jan 15. Earnings per share are estimated at $1.22 on revenue of $17.929 billion, extending a streak of declining profits.
The options market is currently implying an elevated 5.4% move on the earnings report, while Citigroup has only realized an average move of 3% on prior earnings events.
For investors who want to bet against an earnings blowout, a short straddle is an effective options trade to bet on a smaller-than-projected move.
A short straddle is an options strategy where an investor takes no view of the up or down direction of shares on inception. Instead, the trader believes shares will move less either way than the market is anticipating.
With Citigroup closing Thursday at 46.75, investors can consider placing a short straddle by selling the 47 call and 47 put on the Jan. 13 expiry.
This trade can be placed for a credit of $2.95 per share, which also coincides with the maximum gain of $295 if the shares trade exactly at 47 on expiration.
Sweet Spot For Straddle
This trade will earn a profit if Citigroup trades between 43.80 and 49.70 on expiration. Importantly, in the event of a large earnings blowout, the potential losses are unlimited. Traders can take solace that historical earnings moves on Citibank stock have been low.
However, the stock has had one outsized move recently, exploding over 13% higher after second-quarter results came out July 15. The move certainly came as an outlier as the company trounced analyst estimates, even as the other three big banks that reported before Citi missed revenue expectations.
Because recessionary fears are becoming priced in and banks have started deleveraging, it appears unlikely Citigroup will have a similar blowout or even a move above the current 5.4% the market is implying. This makes a short straddle a particularly attractive trade to take on Citibank stock.
Citibank has had muted trading recently, registering a mediocre Relative Strength Rating of 53. Shares have found support around their 50-day moving average this week, though they remain below the 200-day line.
